Risk Management

1. Define “Insurable Interest”, identify why there is a requirement for “Insurable Interest” in an insurance policy, and describe what an “Insurable Interest” is in Property & Casualty insurance and Life Insurance, and highlight the differences between the two.

An Insurable Interest is an interest in the subject matter of the insurance and that insurance is insurable. Generally, an Insurable Interest exists only if the insured would suffer a financial loss in the event of damage to, destruction of or loss of the thing insured.

In Property & Casualty, the insured must have a pecuniary (financial interest) in the object being insured. That interest must exist at the time that the loss takes place.

In Life Insurance, an insured always has an insurable interest in his/her own life. Otherwise, the owner of the insurance policy must have a close family relationship with the life being insured (parent, spouse, children, siblings), or have a pecuniary interest in the life insured (receives support or is an employee).

2. Adelley is involved in an auto accident when Junior runs a red light and damages Adelley’s car in the amount of $5,000. Junior is at fault for the accident. State Garden, Adelley’s insurance company reimburses Adelley for the damage to her car, less a $1,000 deductible. Assuming there is a “Subrogation Clause” in the insurance contract between Adelley and State Garden, what are the rights of Adelley and State Garden against Junior?

With a subrogation clause, to the extent that an insurance company pays a loss to an insured, the rights of the insured against a liable third party are subrogated (relinquished) to the insurance company. Therefore, State Garden can sue Junior for $4,000 and Adelley can sue Junior for $1,000.

3. In insurance, it is generally the case that the Insurer accepts the offer of the Insured to purchase insurance. Describe the rules for the ability of an Agent and Broker to accept the offer from the Insured in the Property & Liability and Life Insurance industries.

Generally, whether an Agent can bind the company (accept the offer) depends on the type of insurance. In the Property & Casualty industry, and Agent may accept the offer. In the Life Insurance industry, the Agent may not bind the insurance company.

A Broker may never accept the offer (bind the company).

4. Describe the concept of “Legal Object” in contract law, and give 2 examples that might give rise to an illegal object in insurance.

A contract must be legal in its purpose. Therefore, an insurance contract may not insure an illegal activity.

Meth Lab

Gambling equipment (unlawful gambling establishment)

A Still

Chapter 10: Managing Personal Risks

Answer the following questions (3.33 pts each).

1. Briefly explain how the human life value approach differs from the needs approach in determining the amount of life insurance an individual should approach.

The human life value approach focuses on the income that would be lost in the event of the wage earner's death. The needs approach focuses on the allocation of that income and the various needs for which it would provide. In a sense, the needs approach is simply the other side of the human life value approach.

2. Identify the sources other than life insurance that might provide resources to meet needs in the case of premature death.

Resources (other than life insurance) that may be available in the case of premature death include social security benefits, income produced by other family members, and personal savings. Depending on the circumstances of death, funds may also be available from workers compensation.

3. Explain why the disability needs for a particular individual are likely to be even greater than the needs in the case of premature death? How should an individual handle the risk of disability.

If the breadwinner of the family dies, the family's income stops; if he or she is disabled, not only does the income stop but expenses remain the same and usually increase. Because a disabled person--by definition--is one whose ability to work is impaired, he or she must depend on sources other than employment for income. Other members of the family may have to quit work to care for the disabled person (or someone may need to be hired to care for him or her). Further, while the absence of dependents may eliminate the need for life insurance, it does not eliminate the need for disability income protection, since the disabled person will need income during a period of disability. Finally, the chance of loss from disability is greater at most ages than the chance of death.

An individual, upon obtaining employment, should obtain both a short-term and a long-term disability policy. Once the individual is able to establish a savings fund of 3 to 6 months of expenses, the individual may cancel the short-term disability policy, but retain the long-term disability policy.

Chapters 12/13/14/15

Answer the following questions (2.5 pts each).

1. Describe the relationship between the death benefit and the cash value of cash value and savings type of life insurance policy.

The Death Benefit of a savings type of life insurance policy is the amount of benefit that the policy will pay the owner of the policy upon the death of the insured. The Cash Value of the policy is the amount that owner of the policy will receive if the owner of the policy terminates the policy prior to the death of the insured.

As the policy ages, and the owner pays a premium, the percentage of the death protection decreases as the percentage of the Cash Value increases. However, the total Death Benefit does not change.

2. Explain why the Level Premium for a 5 year term policy is not 1/5th of the Net Single Premium for the same 5 year policy.

A Level Premium for a 5 year term policy is based upon the assumption that the policy will be paid for over the 5 year term in equal annual payments. Therefore, the Insurer receives the policy premium at the beginning at each period so does not have the ability to invest each premium for only one annual period.

With a Net Single Premium policy, the entire premium for the 5 year period is paid at the initiation of the policy. Therefore, the Insurer will have the ability to invest a greater portion of the premium for a longer period of time.

3. Explain the “Incontestable Clause” and the interaction of that clause with the “Misstatement of Age Clause”.

The Incontestable Clause prohibits the Insurer from contesting any fraud or misrepresentation of the Insured after two years have passed. Once the two year period has passed, the Insurer must pay the full death benefit upon the death of the Insured.

An exception to the Incontestability Clause is the Misstatement of Age Clause. If an Insured misrepresents his/her age, then upon discovery of the misstatement, even outside of the 2 year Incontestable period, the Insurer may adjust the amount of insurance provided to reflect the true age of the Insured

4. Describe and differentiate between the “Guaranteed Insurability Option” and the “Cost-of-Living Riders”.

With the Guaranteed Insurability Option, the Insurer provides an option for the owner of the insurance policy to purchase additional amounts of insurance without having to prove insurability. The options typically occur at certain dates during the life of the policy.

With the Cost-of-Living Riders, the amount of the insurance is increased based upon some measure of inflation, such as the Consumer Price Index (CPI). The owner does not have to prove insurability in order to exercise the option.

The Guaranteed Insurability Option allows the owner to purchase additional insurance. The Cost-of-Living Rider allows the owner to protect the purchasing power of current amount of insurance.

Chapters 21/23: Health Insurance

Answer the following questions (3.33 pts. each)

1. Give reasons for the coinsurance feature and the deductible in the major medical policy.

The deductible of a major medical policy is designed to exclude small relatively certain losses from coverage. The coinsurance provision is designed to control the level of expenses in excess of the deductible. These features, originally introduced in the first major medical policies, have become standard features of most health insurance policies today.

2. Discuss the “Coordination of Benefit” provision. What policy pays first in the event that someone is covered by multiple policies.

Many households today, both spouses (domestic partners) work and have health insurance provided by employers. The “Coordination of Benefits” provision covers the instance when one person is covered by multiple policies. Under the typical Coordination of Benefits provision, the employee is covered by his/her employer’s policy first, with the spouse’s (domestic partner’s) policy being secondary, and would cover any excess. For children of the couple, the policy of the parent whose birthday is earliest in the year will usually be the primary policy.

3. Discuss the reasons that employers provide their employees benefits (health insurance, life insurance, pension benefits) in addition to monetary compensation.

First, employees find it advantageous to accept insurance as part of their compensation for tax reasons. Salary is taxable (income taxes and payroll taxes). Qualified employee benefits paid for by the employer are exempt from these taxes. Employers receive a tax deduction, but do not have to pay employer payroll taxes. Even to the extent that the employee pays for the benefit, since the benefit is part of a group policy, the cost is less than if the employee obtained the benefit on his/her own. Finally, many employers believe that employee benefits improve morale and motivation.