Risk management and insurance planning Quiz 2 (chapters 10,11,12,13,14)

Insurance parts

• Declarations

• Definitions

• Insuring agreement

• Exclusions

• Conditions

• Endorsements/riders

Insurance declarations

who/what/when/where/how much

Insurance definitions

what key terms mean

Insurance insuring agreement

Insurer’s promise

Insurance exclusions

what is not covered

Insurance conditions

Requirements and limitations

Named perils

List of things covered

Open perils

List of things not covered/excluded

Perils that can’t be covered

earthquake or riot

An exclusion might mean

you have to buy a separate policy for it

Exclusion examples

flood, car, rental, etc.

What affects whether a claim is payable?

Conditions

Endorsements

Modifies/adds/subtracts property/liability coverage

Rider

Modifies/adds/subtracts life/health coverage

Deductible

Amount of loss retained by the insured

Straight deductible

Applies to individual covered loss

Aggregate deductible

Accumulates covered losses during a stated period

Calendar year deductible

Annual form of aggregate deductible

A higher deductible can reduce what?

• Premium

• Small claims

• Moral and morale hazards

Property coinsurance

To encourage correct amount of insurance coverage is carried

Coinsurance property formula

Insurance carried / insurance required x loss

What fields is coinsurance used in?

Property and health

Coinsurance for property cause…

Premiums go up for false claims

Health coinsurance

Insured pays a percentage after the deductible and helps reduce frequent visits/tests

Insurance provisions definition

Preserve indemnity and prevent profiting from the same loss

Pro rata liability

Each insurer pays according to its share of total coverage

Contribution by equal shares

Insurers contribute equally until a limit or the loss is reached

Primary

Pays before excess coverage applies

Health coordinaton of benefits

Place employee coverage before dependent coverage

Insurance provisions examples

• Pro rata liability

• Contribution by equal shares

• Primary vs. excess

• Health coordination of benefits

Core planning sequence

exposure, consequence, need, policy

Should you start with the exposure or the product?

exposure

What are the 2 types of exposure approaches

human life value and needs analysis

Human life value exposure approach

• Focuses on pv of future earnings

• Accounts for deductions

• Discounts future amounts to pv

• Tvm

Needs analysis exposure approach

• Real estate clearance fund

• Readjustment period

• Dependency period

• Survivor life income

• Special needs: mortgage, education, emergency reserves, etc.

• Retirement needs

Additional coverage gap

Calculated need - existing insurance

Term life

• Temporary protection

• No cash value

• Renewable

• Convertible

• Low initial premiums

• Useful when the underlying need is temporary

Renewability

Continuation under policy terms

Convertibility

• Exchange term for permanent coverage without new evidence of insurability

• Subject to policy terms

• Valuable if health changes

Adverse selection

Affects insurer pricing and renewal economics

Whole life

• Permanent protection

• Level premiums

• Cash value

• Guaranteed elements

• Policy loans

• Cash surrender value

• Appropriate only when the client’s need justifies the structure and cost

Limited-payment life

Lifetime protection with premiums for a limited period

Endowment

Pays death benefit on death or specified maturity value if insured survives

Universal life

• Flexible premiums

• Cash value account

• Mortality and expense charges

• Interest credited to cash value

• Death-benefit options

• Flexibility introduces monitoring requirements

IUL (indexed)

• Credited interest linked by formula to an external index

• Policy terms may include caps/floors

• Not the same as directly owning it

VUL (variable)

• Separate account investment choices

• Policyholder bears investment risk

• Creates a more direct investment risk connection

Special Life

• Modified life

• Preferred-risk underwriting

• Joint life/first to die

• Second to die/survivorship

• Estate liquidity and business planning applications

Planning process steps

1. Identify the exposure

2. Measure the financial consequence

3. Identify existing resources

4. Determine temporary vs. permanent needs

5. Calculate insurance need

6. Select an appropriate contract

7. Evaluate policy/company and monitor over time

What do policy provisions determine?

• Who controls the contract

• What happens when premiums are late

• How beneficiaries are treated

• What happens to cash value

• What the client can do

Life insurance

Transfer of risk for early death

Annuities

Transfer of risk for outliving your money

Ownership clause

• Policyowner holds contractual rights while the insured is living

• Allowed to change beneficiaries and surrender the policy (subject to the contract)

• Ownership can be transferred using the insurer’s required form

• The owner can be the same as the insured

Entire contract clause

• Very regulated, enforceable by law, and clear

• Limits the ability to change the contract outside the stated contractual framework

Incontestability clause

• Limits the changes/insurer’s ability to contest the policy after a specific period

• To protect benificiaries from very late challenges

Suicide provision

• Insurer denies the death claim and will return the premiums paid, but not the full death benefit (less than 2 years)

Grace period

Allows for 31 days to pay overdue premium before coverage ends

Reinstatement

Allos policy to be restored under certain conditions and not surrendered

Misstatement of age or sex

Adjusts benefit to what premium would have been at time of purchase if this mistake didn’t happen

types of assignment of life inurance

Asolute and collateral

Absolute assignment

Transfers ownership rights

Collateral assignment

Transfers specified rights as security for a debt

Policy loan

Borrowing against cash value and interest is charged

Automatic premium loan (APL)

Cash prevent lapse and pull, but can also consume cash value

Policy loan

Borrowing against cash value; interest is charged

Automatic premium loan

Cash value is automatically used to pay an overdue premium after grace period when the provision applies

Dividend option sources

• Mortality experience

• Investment earnings

• Expense experience

Dividend option uses

• Get cash

• Premium reduction

• Accumulate at interest

• Paid-up additions

• One-year term

Nonforfeiture options definition

Applies to cash-value policies when coverage is surrendered or terminates under applicable conditions

Nonforfeiture options examples

• Cash surrender value

• Reduced paid-up insurance

• Extended-term insurance

Cash surrender

• Take the cash value

• Liquidity priority

Reduced paid-up

• Use value to buy smaller amount of permanent paid-up insurance

• Permanent death benefit priority

Extended term

• Use value to buy term coverage for a specified period of time

• Temporary protection priority

Life Income options

• Life

• Life with guaranteed period

• Life with guranteed total amount

• Joint and survivor

Life income

Payments continue while the beneficiary is alive

Life income with guranteed period

Adds minimum a payment period

Life income with guranteed total amount

Adds a minimum total payout concept

Joint and survivor

Income continues based on the lives of two or more people

Life insurance options

• Waiver of premium

• Term rider

• Guaranteed purchase

• Accidental death

• Cost of living

• Accelerated benefits

Waiver of premium

When qualified disability requirements are met

Term insurance rider

Adds temporary term coverage

Guranteed purchase/insurability

Future coverage may be purchased without new evidence of insurability at specified terms

Accidental death benefit

Additional benefit for qualifying accidental death

Cost of living rider

Increases coverage based on stated terms

Accelerated benefits

Permits access to part of the death benefit when qualifying conditions are met

Traditional cost method

• Subtract cash values and expected dividends from premiums

• Produces net cost figure over selected period

• Ignores TVM

Interest-adjusted cost indices

• Accounts for TVM

• 2 types

What are the 2 types of interest-adjusted cost indices?

Surrender cost index and net payment cost index

Surrender cost index

Evaluates cost if policy is surrendered at a specified point

Net payment cost index

Evaluates relative cost when death occurs at end of selected period and policy is not surrendered

Policy illustrations

Designed to communicate premiums, accumulation values, cash surrender values, and death benefits

Annuity exclusion ratio

Original investment / expected return x payment

Accumulation period

Value builds inside the contract

Annuitization’liquidation period

Value is distributed or converted into income

Immediate annuity

Income begins shortly after purchase

Deferred annuity

Income begins at a future date

Annuity payout options

• Life

• Life with period certain

• Installment refund

• Cash refund

• Cost of living features

Life only

• Highest longevity protection

• Payments stop at death

Life with period certain

Gurantees payments for a specified minimum period

Installment refund

Continues payments until purchase price has been returned through installments

Cash refund

Remaining amount can be paid as a lump sum under contract terms