Risk Mgmt + Ins : Exam 2

What is insurable interest in life insurance required?

At the time the policy is purchased.

When is insurable interest required in property insurance?

At the time of loss.

What does insurable interest require?

The insured must be financially affected by a covered loss.

How can insurable interest be evidenced?

Close family ties, marriage, financial interest, or secured creditor status.

What is the principle of utmost good faith?

Both parties must disclose material facts honestly.

What are the three doctrines supporting utmost good faith?

Representations, concealment, and warranty.

What is misrepresentation in insurance?

A false statement of a material fact relied upon by the insurer.

What is concealment in insurance?

Intentional failure to disclose a material fact.

What is a warranty in insurance?

A statement that becomes an enforceable part of the contract.

What is an aleatory contract?

A contract where values exchanged may be unequal and depend on an uncertain event.

What is waiver?

Intentional relinquishment of a known legal right.

What is estoppel?

Prevents a party from exercising a right because of previous actions.

What is the difference between waiver and estoppel?

Waiver is intentional relinquishment; estoppel prevents exercising a right due to prior actions.

What rights does the first named insured have?

Authority to change the policy, pay premiums, and receive insurer notices.

What is open-perils coverage?

Covers all losses except those specifically excluded.

What is named-perils coverage?

Covers only losses specifically listed in the policy.

What does DICE stand for in insurance?

Declarations, Insuring agreement, Conditions, Exclusions.

What are insurance exclusions?

Perils or situations specifically not covered by the policy.

Where are insured duties after a loss described?

Conditions section.

What is an elimination or waiting period?

A form of deductible.

What is a straight deductible?

An amount subtracted from every covered claim.

What is an aggregate deductible?

Claims accumulate until the deductible amount is reached.

What are three purposes of deductibles?

Eliminate small claims, reduce premiums, and reduce moral/attitudinal hazard.

What is subrogation?

Insurer takes the insured's rights to recover from a responsible third party.

What are three purposes of subrogation?

Prevent double recovery, hold negligent parties responsible, and reduce insurance rates.

What are the requirements of an insurance contract?

Offer and acceptance, consideration, competent parties, and legal purpose.

What are the three categories of torts?

Intentional torts, negligence, and strict liability.

What are the four elements of negligence?

Duty, breach, injury/damage, and proximate cause.

What is duty in negligence?

Legal obligation to use reasonable care.

What is breach of duty?

Failure to perform the duty of reasonable care.

What is proximate cause?

An unbroken chain of events linking negligence to injury.

What is Res Ipsa Loquitur?

The thing speaks for itself; negligence may be inferred.

What are the three requirements for Res Ipsa Loquitur?

Normally wouldn't occur without negligence, defendant had exclusive control, and claimant did not contribute.

What is contributory negligence?

Any negligence by the claimant prevents recovery.

Under contributory negligence, what if the claimant is 10% at fault?

They cannot recover from the other party.

Under comparative negligence, how are damages determined?

Reduced by the claimant's percentage of fault.

What is the 50% comparative negligence rule?

Claimant cannot recover if 50% or more at fault.

What is the 51% comparative negligence rule?

Claimant cannot recover if 51% or more at fault.

What is pure comparative negligence?

Claimant can recover damages reduced by their percentage of fault, regardless of fault percentage.

Under pure comparative negligence, what if claimant is 48% at fault on $100,000 damages?

$52,000.

Under a 50% rule, what if claimant is 50% at fault?

$0 recovery.

Under contributory negligence, what if claimant is 48% at fault?

$0 recovery.

What are compensatory damages?

General and special damages.

What are general damages?

Non-economic damages such as pain and suffering.

What are special damages?

Economic damages such as medical bills and lost wages.

What is a dram shop?

A bar, tavern, or restaurant selling alcohol.

What does the CANDOR law promote?

Candid communication and meaningful resolutions after patient injury.

What is strict liability?

Liability without proving negligence, often involving abnormally dangerous activities.

What law applies when a tiger mauls a neighbor?

Strict liability.

What are alternative dispute resolution methods?

Arbitration and mediation.

What is premature death?

The risk of dying with outstanding financial obligations.

What is the needs-based approach to life insurance?

Estimates life insurance needs based on survivors' financial needs.

What are the components of the needs-based approach?

Estate clearance, readjustment period, dependency period, mortgage, education, emergency fund, minus assets and insurance.

What is an estate clearance fund?

Money for funeral expenses, medical bills, taxes, and debts.

What is the dependency period?

The period until the youngest child reaches age 18.

What is the readjustment period?

One or two years for survivors to adjust financially.

When is term life insurance appropriate?

Limited income, temporary protection needs, or future insurability guarantees.

What are renewable term policies?

Policies that allow renewal without proving insurability.

What are convertible term policies?

Policies that allow conversion to permanent insurance without proving insurability.

When is ordinary whole life insurance appropriate?

When lifetime protection and a savings vehicle are desired.

What is second-to-die life insurance?

Insures two or more lives and pays after the last insured dies.

What is group life insurance usually?

Less expensive, term insurance, and partly employer-paid.

What is universal life insurance?

Permanent life insurance with flexible premiums and a cash value component.

What is a common monthly deduction in universal life?

Administrative expenses.

What is a limitation of universal life insurance?

Some insurers advertise misleading rates of return.

What is an annuity?

A tax-deferred investment issued by an insurance company that can provide lifetime income.

What risk do annuities protect against?

Longevity risk: outliving financial assets.

What is the key difference between life insurance and annuities?

Life insurance protects against premature death; annuities protect against outliving assets.

What funds annuity payouts?

Premiums, investment earnings, and unliquidated principal of early deaths.

What is an exclusion ratio?

The percentage of annuity payments that is not taxable.

What is the exclusion ratio formula?

Investment in contract ÷ expected return.

What is investment in an annuity contract?

Premiums paid to purchase the annuity.

What is expected return for an annuity?

Expected total payments over the annuitant's life expectancy.

Jenny invests $200,000; receives $1,500 monthly; life expectancy 20 years. Exclusion ratio?

$200,000 ÷ $360,000 = 55.6%.

What is a life annuity with period certain?

Lifetime payments plus guaranteed payments for a specified period.

What happens if an annuitant dies during period certain?

Beneficiary receives remaining guaranteed payments.

What is a joint life annuity?

Payments terminate when the first covered person dies.

What is a joint-and-survivor annuity?

Payments continue to a surviving annuitant at a selected percentage.

Are monthly annuity payments equal across payout options?

No; payments differ based on expected payout periods.

What is a longevity annuity?

An annuity that begins payments at an advanced age, such as 85.

What does an annuity beneficiary receive if death occurs during accumulation?

Cash value or premiums paid.

What is Social Security OASDI?

Old Age, Survivors, and Disability Insurance.

What is PBGC?

Pension Benefit Guaranty Corporation.

What does PBGC do?

Guarantees vested pension benefits up to limits if certain private pension plans terminate.

What is a defined benefit pension plan?

Employer-funded plan providing benefits based on a predetermined formula.

What is a defined contribution pension plan?

Retirement plan where contributions are specified and account value depends on investments.

What is the defined benefit pension formula?

Benefit percentage × years of service × final salary.

Karen earns $100,000, works 36 years, formula 1%. Monthly pension?

$3,000.

Which pension plans have minimum vesting standards?

Defined benefit and defined contribution plans.

What is vesting?

Earning the right to employer retirement contributions.

What are the three retirement ages in pension plans?

Normal, early, and deferred retirement ages.

What happens to early retirement benefits?

Benefits are generally reduced.

What happens to deferred retirement benefits?

Benefits are generally increased.

Are most employees in defined benefit plans?

No; fewer employees participate over time.

What is a defined benefit plan funded entirely by employers?

A pension plan based on a predetermined benefit formula.

What is an IRA?

Individual Retirement Account.

Where can IRAs be established?

Banks, mutual funds, stock brokerages, and insurers.

What is a traditional IRA?

Retirement account with potentially deductible contributions and taxable withdrawals.

What is a Roth IRA?

Retirement account funded with after-tax contributions and qualified tax-free withdrawals.

Which IRA provides an immediate tax benefit?

Traditional IRA, if contributions are deductible.