Life and Health Insurance Exam - Chapter 1: Introduction to Insurance | 40 questions and answers

insurance

business that was developed as a means for spreading the result of financial loss among many persons so the cost to any one person is small

risk

the possibility that loss might occur, reason people purchase insurance

speculative risk

risk that offers the opportunity to gain as well as the possibility of loss, gambling is an example

pure risk

possibility of loss only, type of risk that insurers accept; ex: possibility of financial loss due to an accident, sickness, premature death, insurance's purpose is to make those who lose whole again, restore the insured to their original financial position

peril

the cause of a potential loss. ex: fire, accident, explosion, flood

hazard

condition that increases the seriousness of a potential loss or increases the likelihood that loss will occur. ex: slippery floors, improperly stored gasoline

physical hazards

arise from material, structural, operational features of risk situation (slippery floors)

moral hazards

arise from people's habits and values (false claim)

moral(e) hazards

arise out of carelessness/irresponsibilities (no seatbelt)

legal hazards

arise from court actions that increase the likelihood or size of a loss

Four ways of managing risk

avoid, reduce, retain, transfer

avoid risk

avoiding an auto accident by never driving a car (not all risk is avoidable)

reduce risk

control, examine perils and see which ones can be eliminated (health problems identified in a work place lead to customized wellness program)

retain risk

happens when someone assumes financial responsibility for certain events (insurance deductible in health plans)

transfer risk

harmless agreements or lawsuits

law of large numbers

the larger the group, the more predictable the future losses in the group will be for a given period of time

necessary for the law of large numbers to operate

a large number of similar risks or exposure units (item of property or person insured) be combined

actuaries

mathematicians who study and compile statistical data regarding exposure units and risks

insurable interest

before an individual can benefit from insurance, that individual must have a legitimate interest in the preservation of the life or property insured

why loss must be ascertainable

because the purpose of insurance is to reduce or eliminate the uncertainty of economic loss

loss must be uncertain - how uncertainty arises

out of not knowing what is going to happen or being unable to predict what is going to happen to the individual or exposure unit

economic hardship and magnitude of loss

nature of the loss must be such magnitude that it is worthwhile to incur the premium cost

catastrophic perils

when these perils cause losses, they do not establish a pattern of predictability that can be relied on for future predictions of anticipated loss

indemnity

concept stating insurance should restore the insured, in whole or in part, to the condition he or she enjoyed prior to the loss; restoration may take form of payment for the loss or repair or replacement of the damaged or destroyed property

limit of liability

not used in life and health; commonly used in property and casualty; means the maximum amount the insurer will pay for he specified insured contingency

deductible

the initial amount of a covered loss or losses that the insured must absorb before the insurer begins to pay the additional loss amounts

coinsurance

within a specified coverage range, the insured and insurer will share the allowable expenses

property insurance

protects against financial consequences of the direct or consequential loss or damage to property of every kind

casualty insurance

protects the insured against the financial consequences of legal liability, including that for death, injury, disability, or damage to real or personal property

life insurance

coverage on human lives including benefits of endowment and annuities, and may include benefits in the event of death or dismemberment by accident and benefits for disability insurance, designed to protect against the risk of premature death

annuity

guaranteed income for the life of an annuitant; designed to protect against the risk of living too long (outliving financial resources of income during retirement)

accident and health or sickness insurance

protects against financial loss caused by sickness, bodily injury, accidental death, may include disability income benefits

variable life and variable annuity products

include insurance coverage provided under variable life insurance contracts and variable annuities; carry investment risk

credit insurance

limited line of insurance, protecting insured/creditor against the financial consequences should a debtor be unable to pay their debts due to illness or death

three major insurance sources

private commercial insurers (profit-making), private noncommercial insurers (nonprofit service organizations), and the US Government (special nonprofit)

commercial insurers

private life and health insurers, in the business to make a reasonable profit

noncommercial insurers

operate on a nonprofit basis, blue cross blue shield is an example

stock insurers

commercial; consist of stockholders who own shares in the company; nonparticipating company, policyholders do not participate in dividends

mutual company

no stockholders, commercial; formation funds must be contributed by someone or some group; ownership rests with the policyholders; participating companies; policyowners participate in dividends

service insurance

technically not insurers; organizations providing prepaid plans for hospital, medical, and surgical expenses; no cash benefits to plan subscriber, pay the provider of medical services used by the subscriber to the extent covered in the contract. (BLUE CROSS)