PFM Ch. 25-27

risk

a state of uncertainty where some of the possibilities may result in loss or another undesirable outcome

uncertainty

the likelihood that something will or will not happen, with more than one possibility

pure risk

a chance of loss with no chance for gain; random, e.g. accidents, illnesses, natural disasters

speculative risk

may result in either gain or loss, e.g. gold, futures, options, commodities; not accidental or random

hedging

making an investment to help offset against loss

economic risk

may result in gain or loss because of changing economic conditions and the business cycle

insurance

a method for spreading individual risk among a large group of people to make losses more affordable for all

insurable risk

a pure risk that is faced by a large number of people and for which the amount of the loss can be predicted

insurable interest

any financial interest in life or property such that, if the life or property were lost or harmed, the insured would suffer financially

personal risk

the chance of loss involving your income and standard of living; protect from this by buying life, health, and disability insurance

property risk

the chance of loss or harm to person or real property, e.g. home, car; protect with property insurance

liability risk

the chance of loss that may occur when your errors or actions result in injuries to others or damages to their property; protect with liability insurance

insurer

insurance company; a business that agrees to pay the cost of potential future losses in exchange for regular fee payments

policy

a written insurance contract

premium

a fee, usually paid at regular intervals by the owner of the policy; set based on statistical probability

policyholder

the owner of the policy

indemnification

putting the policyholder back in the same financial condition he or she was in before the loss occurred

risk management

an organized strategy for controlling financial loss from pure risks and insurable risks

risk assessment

understanding the types of risk you will face and their potential consequences

1. Identify risks of loss; daily risks and potential losses

2. Assess seriousness of risks; prioritize risks based on financial consequence

3. Handle risks; risk shifting, risk avoidance, risk reduction, risk assumption

risk shifting or risk transfer

occurs when you buy insurance to cover financial losses caused by damaging events; you shift risk of major financial loss to the insurance company

risk avoidance

lowers the chance for loss by not doing the activity that could result in loss

risk reduction

lowers the chance of loss by taking measures to lessen the frequency or severity of losses that may occur, e.g. studded snow tires or fire alarms

risk assumption

the process of accepting the consequences of risk, possibly establishing a monetary fund to cover the cost of a loss

deductible

the specified amount of a loss that you must pay; increase these to reduce insurance costs because it will reduce your premium

group insurance

premiums for this are usually considerably lower than they are for individual plans

renter's policy

insurance that protects renters from property and liability risks; protects you from damage to person property, liability for injuries to your guests, and loss of person possessions you carry with you outside the home

homeowner's policy

insurance that protects property owners from property and liability risks

crimes

covered by homeowner's policy; criminal activity, such as robbery burglary, arson, and vandalism

liability

covered by homeowner's policy; the cost of another person's losses for injuries at your property

package policies

include several types of coverage in a single contract, usually carry a lower premium than you would pay for each coverage purchased separately

exclusions

items that insurance policies specifically will not cover

overinsuring

buying more insurance than is necessary

replacement value

the cost of replacing an item regardless of its actual cash (market) value

insurance investigators

look for evidence of destroyed or damaged property and look into cases where people try to claim damages that did not occur (false insurance claims)

co-insurance clause

a provision requiring policyholders to insure their building for a stated percentage (usually 80%) of its replacement value in order to receive full reimbursement for a loss

personal property floater

insurance coverage for the insured's moveable property wherever it may be located, usually for items of high value

liability coverage

insurance to protect against claims for bodily injury to another person or damage to another person's property; includes guests and uninvited guests but usually not trespassers

guest

someone you specifically ask to come to your house

uninvited guest

presumed to have permission to be on your property, such as door-to-door solicitors or delivery people

trespasser

unlawful intruder

attractive nuisance

a dangerous place, condition, or object that is particularly attractive to children, such as a swimming pool

driving record

includes the number and type of traffic tickets you've received for driving infractions and misdemeanors along with the number of accidents in which you've been involved

infraction

a minor violation, punishable only by a fine, and includes such things as a parking violation, failure to come to a complete stop at a stop sign, or an improper left-hand turn

misdemeanors

may incur fines as well as jail time, e.g. speeding, driving without a license, reckless driving

surcharge

usually imposed when you are in an accident that is your fault and your insurance company has to pay claims; effectively increases your premium for three years or longer

full coverage

includes liability, collision, comprehensive, PIP, and uninsured/underinsured motorist insurance

collision coverage

automobile insurance that protects your own car against damage from accidents or vehicle overturning; pays for the damage to your car

comprehensive coverage

protects you from damage to your car from causes other than collision or vehicle overturning, e.g. fire, theft, tornado, hail, water, falling objects, natural disasters, vandalism

personal injury protection (PIP) or medical coverage insurance

automobile insurance that pays for medical, hospital, and funeral costs of the insured and his or her family and passengers, regardless of fault

uninsured/underinsured coverage

automobile insurance that pays for your injuries when the other driver is legally liable but unable to pay

no-fault insurance

automobile insurance in which drivers receive reimbursement for their expenses from their own insurer, no matter who caused the accident

assigned-risk pool

consists of people who are unable to obtain automobile insurance due to the high risk they present

umbrella liability insurance

supplements your basic auto and property liability coverage by expanding limits and including additional risks; protects from extraordinary losses

health insurance

a plan for sharing the risk of high medical costs resulting from injury or illness

group insurance

most common type of healthy insurance; all those insured have the same coverage and pay a set premium

Consolidated Omnibus Budget Reconciliation Act (COBRA)

a law that allows people who leave employment to continue their health insurance under the company plan for a limited period of time (usually 18 months)

Healthy Insurance Portability and Accountability Act of 1996 (HIPAA)

limits the pre-existing conditions that group plans may exclude; makes it illegal for an insurer to deny coverage based on health status, though it does not limit the amount the insurer may charge for coverage

coordination of benefits

a group health insurance provision that specifies how the insurers will share the cost when more than one policy covers a claim

Flex 125 Plan or Section 125 FLex Plan

an employee benefit program that allows employees to set aside money, pretax, to help pay deductibles, copayments, and other health expenses during the year that are not covered by insurance

supplemental health insurance

a secondary policy designed to pay high deductibles and copayments as well as medical fees that are higher than the insured's standard policy allows

basic health coverage

includes medical, hospital, and surgical costs

major medical coverage

provides protection against the catastrophic expenses of a serious injury or illness

stop-loss provision

an insurance clause that caps or sets a maximum that the insured has to pay during any calendar year

dental insurance

covers basic dental services, such as exams, cleanings, X-rays, and fillings

vision insurance

pays for exams for eye disease as well as for prescription adjustments and lenses

HSA or health savings account

used in association with a medical plan that carries a high deductible ($1,100 or more)

unmanaged care (traditional fee-for-service) plans

allow participants to choose any doctor and to be reimbursed for a portion of the expenses (usually 80%) incurred after a deductible is met; money is deposited into an HSA account (tax deductible) and then used to pay qualified medical expenses not covered by insurance

managed care plans

rely on a network of health care providers, e.g. health maintenance organizations (HMOs), preferred provider organizations (PPOs), point of service (POS)

health maintenance organization (HMO)

a group plan offering prepaid medical care to its members

primary care physician (PCP)

main provider that patients choose from the HMO staff

preventive care

an advantage to belonging to an HMO, includes things such as routine physical exams and vaccinations

preferred provider organization (PPO)

a group of health care providers (e.g. doctors and hospitals) who band together to provide health services for set fees

point of service (POS) plans

give people more choice and control over medical services, combining the features of HMOs and PPOs

Medicare

government-sponsored health insurance for people aged 65 or older; part of Social Security

Medicaid

government-sponsored health insurance for people with low incomes and limited resources; designed to help families who live in poverty and are unable to afford private health insurance or medical care

disability insurance or income protection

an insurance plan that makes regular payments (usually monthly) to replace income lost when illness or injury prevents the insured from working

waiting period

benefits don't begin the day you become disabled; period may be from 1 to 14 days for short term disability or from 60 to 180 days for long term disability

duration of benefits

usually until age 65 or early retirement if you qualify

guaranteed renewability

will protect you against cancellation of coverage if your health declines

life insurance

provides funds to the beneficiaries when the insured dies

group life insurance plan

insures a large number of people under the terms of a single policy without a medical examination

portability

when you leave your employer, you are able to continue paying the premiums and convert your group policy into an individual policy

incontestable clause

a provision of a life (or health) insurance policy stating that once the policy has been in effect for a stated period of time (usually two years), the insurer may no longer question items on the application in order to deny coverage

rider/endorsement

a small insurance policy that modifies the coverage of the main policy; usually adds or excludes some types of coverage or alters policy benefits

double indemnity

the beneficiary is paid double the face amount of the insurance policy

permanent life insurance

remains in effect for the insured's lifetime and builds a cash value

term life insurance

a life insurance policy that remains in effect for a specified period of time

cash value

the savings accumulated in a permanent life insurance policy that you would receive if you canceled your policy