Insurance Final Guide

Final Exam Study Guide

Five special characteristics of an insurance contract

1. Offer – Applicant must make an offer
2. Acceptance – The insurer can chose to accept, reject, or modify.
3. Consideration – Both parties must make a promise to each other for the contract to apply
4. Competent parties – Both parties must be at least 18 and of a sound mind.
5. Legal purpose – Cannot be illegal

Five types of private insurers

1. Stock Insurers
2. Mutual Insurers
3. Lloyd’s Association
4. HMOs
5. Reciprocal Exchange Insurers

What is the Significance of Paul v. Virginia?

Paul v. Virginia reserved the right to the State to regulate insurance,
and gave no right to the Federal government to regulate insurance
Car & Accident Insurance

Personal Auto Policy (PAP)

- Liability Coverage
- Medical Payment Coverage
- Uninsured Motorist
- Coverage for Damage to the Auto
- Duties After an Accident or Loss
- General Provisions
Type of Coverage

Who is covered

Typical premium increases due to accident
Deductible amount

Homeowners Insurance

Types of Homeowners Insurance, pg 440

  • HO-2 (Broad Form) – Covers the dwelling, other structures, and personal property on a named perils basis
  • HO-3 (Special Form) – Covers the dwelling and other structures on a risk-of-direct physical loss basis. All direct physical losses are covered except those losses specifically excluded. Personal property is covered on a named perils basis.
  • HO-4 (Contents Broad Form) – Covers a tenant’s personal property on a named perils basis
  • HO-5 (Comprehensive Form) – Provides open perils coverage (“all risks coverage”) on the dwelling, other structures and personal property. All direct losses are covered except those losses specifically excluded.
  • HO-6 (Unit-Owners Form) – Covers personal property on a named perils basis. A minimum of $5,000 of insurance is also provided on the condo unit that covers improvements and additions and certain other types of other property.
  • HO-8 (Modified Coverage Form) – Specifically designed for older homes
  • California FAIR Plans – Special risks


Determination of Policy Amounts

  • Section I – Basic Coverage

o Coverage A – Dwelling coverage amount that determines all other Section I Coverage
o Coverage B – Other Structures – 10% of Coverage A
o Coverage C – Personal Property -50% of Coverage A
o Coverage D – Loss of Use – 30% of Coverage A
o Additional Coverage – See specific limits

  • Section II – Liability Coverage (Basic limit are same for all HO policies)

o Coverage E – Personal Liability ($100,000 per occurrence)
o Coverage F – Medical Payments to Others ($1,000 per person)

  • Exclusions (A & B):

o Collapse (unless under Additional), freezing to plumbing, heating air conditioning, auto fire sprinklers, damage to pavement, patios, swimming pools, similar structures from ice, water pressure, freezing or thawing damage

Liability Insurance
Professional Liability
Product Liability
Umbrella Insurance
Social Insurance
Social Security
Medicare Supplement
State Disability Income
Worker’s Compensation
Benefit Period
Life Insurance
Death Benefit
Type of Life Insurance
Group Coverage
Total Benefit Amount
Accidental Death & Disability (AD&D)
Annuities – Promise to pay
Medical Insurance
Deductible Amount
Out of Pocket Maximum
Lifetime Maximum
In-or-out Network Expenses
Disability Insurance
Elimination Period - Short
Benefit Period - Fat
Group or Individual
Premiums Paid By
Make Sure You Know What Is and Isn’t Covered
• Is bonus or deferred comp included?
• Are commissions included?
• Gross pay or net pay after deductions?
• W-2 based income?
• Employer reported income?
• Executive/Partner comp package?
• Long-term Care Insurance
Indemnity or Hospital
Daily Benefit Amount / Indemnity Amount
Waiting Period
Benefit Amount
Benefit Period Limit
Activities of Daily Living (ADL)
Partnership Policy
Survivor Plan
Change Named Insured Benefit
Referral System
Four Types of Private Insurers
1. Stock insurers
2. Mutual Insurers
3. Reciprocal Exchange
4. HMOs
Four Different Types of Possible Benefits to Employees (May Be Stacked)
1. Health
2. Dental
3. Life Insurance
4. Disability Insurance
Four Special Characteristics of an Insurance Contract
1. Aleatory
2. Unilateral
3. Conditional
4. Personal
Bonehead Analysis
F – Final Expenses
E – Emergency Fund & Education Expenses
M – Mortgage
U – Unemployment
R – Retirement
The Taft-Hartley Act of 1947 – Favored compensation – 15% to 30% or more

Reading Notes (Going in reverse order)
Chapter 13 – Buying Life Insurance, pg 267
• Determining the Cost of Life Insurance
o Four major factors must be considered
 Annual Premiums
 Cash Values
 Dividends
 Time Value of Money
• Rate of Return on Saving Component
• Taxation of Life Insurance
• Shopping for Life Insurance
o Determine Whether You Need Life Insurance
 Dependents or marriage
 Paying off mortgage on home
 Accumulation of large assets
o Estimate the Amount of Life Insurance You Need
 Consider family’s present and future financial needs
• Potential survivor benefits from Social Security
• Other financial assets currently owned
o Decide on the Best Type of Life Insurance for You
 For temporary need, consider term insurance
 For lifetime protection, consider ordinary life insurance or universal life insurance
 Avoid purchasing a policy that you cannot afford
• If you drop a cash-value policy after a few months or years, you will lose a substantial amount of money.
o Decide Whether You Want a Policy That Pays Dividends
 If you believe that interest rates will be higher in the future, you should consider a participating policy because excess interest has a powerful impact on dividends
o Shop Around for a Low-Cost Policy
 Compare the interest-adjusted cost of similar policies from several insurers before you buy any
o Consider the Financial Strength of the Insurer
Chapter 14 – Annuities and Individual Retirement Accounts, pg 288
• Individual Annuities
• Types of Annuities
• Taxation of Individual Annuities
• Individual Retirement Accounts
• Adequacy of IRA Funds
Chapter 11 – Life Insurance, pg 210
• Premature Death
o Death of a family head with outstanding unfulfilled financial obligation
• Final Impact of Premature Death on Different Types of Families
• Amount of Life Insurance to Own
o Human life value approach – the present value of a family’s share of the deceased breadwinner’s future earnings.
o Needs approach – the amount of family needs that must be met is the amount needed. The most important family needs are the following:
 Estate clearance fund
 Income during the readjustment period
 Income during the dependency period
 Life income to the surviving spouse
o Capital retention approach – preserves the capital needed to provide income to the family
• Types of Life Insurance
o Term Insurance (Temporary protection)
 Most are renewable without evidence of insurability
 Most are convertible without evidence of insurability
 Types of Term Insurance
 Uses of Term Insurance
• If the amount of income that can be spent on life insurance is limited
• If the need for protection is temporary
 Limitations of Term Insurance
• Premiums increase with age at an increasing rate and eventually reach prohibitive levels
• Inappropriate if you wish to save money for a specific need (no cash value)
o Whole Life Insurance
 Provides lifetime protection
 Ordinary Life Insurance (Whole Life)
• Level-premium policy that provides lifetime protection to age 100
• Accumulation of cash-surrender values which is the amount paid to a policyowner who surrenders the policy
• Variations of Whole Life Insurance
o Variable Life Insurance
 Fixed-premium policy in which the death benefit and cash values vary according to the investment experience of a separate account
 Variable life policy is a permanent whole life contract with a fixed premium
 The entire reserve is held in a separate account and is invested in common stocks or other investments
 Cash surrender values are not guaranteed, and there is no minimum guaranteed cash values
o Universal Life Insurance (flexible premium life insurance)
 A flexible premium policy that provides protection under a contract that unbundles the protection and saving components
 Unbundling of Component Parts – policyowner receives an annual statement that shows the premiums paid, death benefit, value of the cash-value account, mortality chare and interest credited to the cash-value account
 Two Forms of Universal Life Insurance
• Level Death Benefit – pays a level death benefit during the early years and later must meet the corridor test required by the IRS
• Increasing Death Benefit – As cash value increases, so does the death benefit
 Considerable Flexibility
• Policyowner determines the frequency and amount of premium payments
• Death benefit can be increased or decreased
• Policyowner can add cash value to the policy at any time
 Limitations of Universal Life
• Misleading rates of return; decline in interest rates; right to increase the mortality charge; lack of firm commitment to pay premiums
• Other Types of Life Insurance
Chapter 12 – Life Insurance Contractual Provisions, pg 243
• Life Insurance Contractual Provisions
o Ownership Clause –Who owns the policy
o Entire-Contract Clause - the life insurance policy and attached application constitute the entire contract between the parties
o Incontestable Clause – The insurer cannot contest the policy after it has been in force two years during the insured’s lifetime
o Suicide Clause – if the insured commits suicide within two years after the policy is issued, the face amount of the insurance will not be paid; there is only a refund of the premiums paid
o Grace Period – the policyowner has a period of 31 days to pay an overdue premium
o Reinstatement Clause – permits the owner to reinstate a lapsed policy
o Misstatement of Age or Sex Clause – the amount payable is the amount that the premiums paid would have purchased at the correct age and sex
o Beneficiary Designation
o Change-of-Plan Provision – allows policyowners to exchange their present policies for different contracts
o Exclusions and Restrictions
 War Clause – excludes payment if the insured dies as a direct result of war
 Aviation Exclusion; Auto Racing; Skydiving; Scuba Diving; Hang Gliding
o Payment of Premiums: annually, semi-annually, quarterly, or monthly
o Assignment Clause
 Absolute Assignment – ownership rights in the policy are transferred to a new owner
 Collateral Assignment – temporarily assigns a life insurance policy to a creditor as collateral for a loan
o Policy Loan Provision – allows the policyowner to borrow the cash value
o Automatic Premium Loan – overdue premium is automatically deducted from the cash value after the grace period expires
• Dividend Options – Participating or non-participating
• Non-forfeiture Options
o Cash Value
o Reduced paid-up insurance
o Extended term insurance
• Settlement Options
o Cash
o Interest Option
o Fixed-period option
o Fixed-amount option
o Life income option
• Additional Life Insurance Benefits
o Wavier-of-Premium Provision
o Guaranteed Purchase Option – enables to purchase additional amount of life insurance at specified times in the future without evidence of insurability
o Accidental Death Benefit Rider – doubles the face amount if death occurs as a result of an accident
o Cost-of-Living Rider (COLA)
o Accelerated Death Benefits Rider
o Viatical Settlement
o Life Settlement
Chapter 10 – Analysis of Insurance Contracts, pg 193
• Basic Parts of an Insurance Contract
o Declarations
o Definitions
o Insuring Agreement
o Exclusions
o Conditions
o Miscellaneous Provisions
• Definition of “Insured’
• Endorsements and Riders
• Deductibles – a provision where a specified amount is subtracted from the total loss payment that otherwise would be payable
o Deductibles in Property insurance
 Straight Deductible – the insured must pay a certain number of dollars of loss before the insurer is required to make a payment
 Aggregate Deductible – all losses that occur during a specified time period, are accumulated to satisfy the deductible amount
• Coinsurance
o Nature of Coinsurance – encourages the insured to insure the property to a stated percentage of its insurable value
o Purpose of Coinsurance – the fundamental purpose of coinsurance is to achieve equity in rating
• Coinsurance in Health Insurance
o The purposes of coinsurance in health insurance are (1) reduce premiums and (2) to prevent overutilization of policy benefits
• Other-Insurance Provisions
o Pro Rata Liability
o Contribution by Equal Shares
o Primary and Excess Insurance
Chapter 18 – Social Insurance, pg 386
• Social Insurance
o Reasons for Social Insurance: Solve complex social problems, because certain risks are difficult to insure privately, provides a base of economic security to the population
o Basic Characteristics of Social Insurance
 Compulsory programs; floor of income; emphasis on social adequacy rather than individual equity; benefits loosely related to earnings; benefits prescribed by law; no means test; full funding unnecessary; financially self-supporting
• Old-Age, Survivors, and Disability Insurance
o Covered Occupations
o Determination of Insured Status
 Fully insured – 40 credits
 Currently insured – at least 6 credits during the last 13 calendar quarters ending with the quarter of death, disability, or entitlement to retirement benefits
 Disability insured
• Disabled before 24, need 1 ½ years of work in the three years before being disabled
• For ages 24 to 30, need half of the persons age minus 21
• Above 31, need at least 20 credits in the 10 years before being disabled
• More options on page 390
• Types of Benefits
o Retirement Benefits
 Full Retirement Age: < 1937 = 65; 43’-54’ = 66; 60’ = 67
 Early Retirement Age: Begins at 62
 Monthly Retirement Benefits
 Retirement Benefit Amount
 Delayed Retirement
 Automatic Cost-of-Living Adjustment
 Earnings Test
o Survivor Benefits
o Disability Benefits
 Be disability insured
 Meet a five-month waiting policy
 Satisfy the definition of disability
o Taxation of the OASDI Benefits
 Must pay income tax on part of the benefits
• $25,000 to $34,000 – 50% of benefits are taxed
• $34,000+ - 85% of benefits are subject to taxation
• Married: $32,000 to $44,000; $44,000+
 Financing Social Security Benefits
• Medicare
o The Original Medicare Plan
 Hospital Insurance (Medicare Part A) – covers inpatient hospital stays and other benefits as well
• Inpatient Hospital Care
• Skilled Nursing Facility Care – Covers a max of 100 days
• Home Health Care
• Hospice Care
• Blood Tranfusions
 Medical Insurance (Medicare Part B)
• Physician services and other services
• Clinical laboratory services
• Home health care
• Outpatient hospital services
• Blood
 Amount Paid by Part B – pays 80% of the Medicare-approved amount for most physicians services, outpatient therapy, certain preventive services, and durable medical equipment
 Part B Monthly Premiums
o Medicare Advantage Plans (Part C) – private health plans that are part of the Medicare program
 Medicare PPOs; Medicare HMOs; Medicare Private Fee-for-Service Plans; Medical Savings Account Plans; Medicare Special Needs Plans
o Medicare Prescription Drug Coverage (Part D) – covers only prescription drugs
o Medigap Insurance – A to L letter designations
o Other Medicare Health Plans
o Medicare Prescription Drug Plans
• Problems and Issues
• Unemployment Insurance
• Workers Compensation
o Development of Workers Compensation
o Objectives of Workers Compensation
 Broad coverage of employees for job-related accidents and disease
 Substantial protection against the loss of income
 Sufficient medical care and rehabilitation services
 Encouragement of safety
 Reduction in litigation
Chapter 15 – Individual Health Insurance Coverage, pg 308
• Health-Care Problems in the United States
• Individual Health Insurance Coverage
• Major Medical Insurance – pays a high percentage of covered expenses incurred by an insured who has a catastrophic illness or injury
o High lifetime limits
o Broad range of benefits
o Deductible: Typically $500, $1000, $1500, $2000, or some higher amount
o Coinsurance
o Out-of-pocket limit
o Exclusions
o Internal limits
• Health Savings Accounts – tax-exempt or custodial account established exclusively for the purpose of paying qualified medical expenses for the qualified beneficiary
o Eligibility Requirements
o High-Deductible Health Plan
o Contribution Limits
o Favorable Tax Treatment
o Rationale for HSAs
 Lower premiums
 HSA can be used for retirement
 Portability
• Long-Term Care Insurance
o Chance of Entering a Nursing Home
o Basic Characteristics
 Types of Policies: Facility-only, home health care, comprehensive policy
 Choice of Benefits (Short and Fat)
 Elimination Period
 Eligibility of Benefits
• Activities of Daily Living (ADLs): Eating, bathing, dressing, transferring from bed to a chair, using the toilet, and maintaining continence
• Severe cognitive impairment
 Inflation protection
 Guaranteed Renewable Policy
 Expensive Coverage
 Non-forfeiture Benefits
 Taxation of Long-Term Care Insurance
• Disability-Income Insurance – important form of individual health insurance
o Meaning of Total disability
 Definition of Total Disability
• Inability to perform all duties of the insured’s own occupation
• Inability to perform the duties of any occupation for which the insured is reasonably fitted by education, training, and experience
• Inability to perform the duties of any gainful occupation
• Loss-of-income test
 Partial Disability – the inability of the insured to perform one or more important duties of his or her occupation
 Residual Disability – pro rata disability benefit is paid to an insured whose earned income is reduced because of an accident ore sickness
o Benefit Period – length of time that disability benefits are payable after elimination period is met
o Elimination Period – Waiting period which time benefits are not paid
o Wavier of Premium – Disabled for 90 days, future premiums will be waived
o Rehabilitation Provision
o Accidental Death, Dismemberment and Loss-of-Sigh Benefits
o Optional Disability-Income Benefits
• Individual Medical Expense Contractual Provisions
• Shopping for Individual Health Insurance
o Insure for the Catastrophic Loss
o Consider Group Health Insurance First
o Purchase a Policy that has a preferred provider network
o Don’t Ignore Disability-income insurance
o Avoid Limited Policies
 Limited policy covers only certain diseases or accidents, pays limited benefits, or places serious restrictions on the right to receive benefits.
o Use Deductibles and Elimination Periods to Reduce Premiums
Chapter 26 – Commercial Liability Insurance, pg 592
• General Liability Loss Exposures
o Premises and Operations Liability – Ownership and maintenance of the premises
o Products Liability – Legal liability of manufacturers, wholesalers, and retaliers
o Completed Operations Liability
o Contractual Liability
o Contingent Liability
• Commercial General Liability Policy
o Section I – Coverages
 Coverage A: Bodily Injury and Property Damage Liability
 Defense Costs
 Exlusions: Expected or intented injury, contractual liability, liquor liability, workers compensation, employers liability, pollution exclusion, aircraft and auto exclusion
 Fire Legal Liability Coverage
 Coverage B: Personal and Advertising Injury Liability
 Coverage C: Medical Payments – Covers those injured in an accident on premises
 Supplementary Payments: Coverage A and B
o Section II – Who is an Insured?
o Section III – Limits of Insurance
 General Aggregate Limit
 Products-completed Operations Aggregate Limit
 Personal and Advertising Injury Limit
o Section IV – Commercial General Liability Conditions
o Section V - Definitions
• Employment-Related Practices Liability Insurance
• Workers Compensation Insurance
o Part One: Workers Compensation Insurance
 Insurer agrees to pay all workers compensation benefits and other benefits that the employer must legally provide to covered employees who have job-related injury or an occupational disease
o Part Two: Employers Liability Insurance
 Covers employers against lawsuits by employees who are injured in the course of employment, but whose injuries (or disease) are not compensable under the state’s worker’s compensation law
o Part Three: Other-States Insurance
 Applies as if that state were listed in the policy for workers compensation purposes
• Commercial Auto Insurance
o Business Auto Coverage Form
 Liability Insurance Coverage
 Physical Damage Coverage
• Aircraft Insurance
• Commercial Umbrella Policy
o Typically: Commercial general liability insurance, business auto liability insurance, employers liability insurance
• Businessowners Policy
o Business Liability
o Medical Expenses
o Legal Defense
o Exclusions
• Professional Liability Insurance
o Professionals like physicians, attorneys, engineers, and other professional s may need this insurance.
o Errors and Omissions Insurance
• Directors and Officers Liability Insurance
Chapter 25 – Commercial Property Insurance
• Commercial Package Policy
• Building and Personal Property Coverage Form
• Causes-of Loss Forms
• Reporting Forms
• Business Income Insurance
• Other Commercial Property C overage
• Transportation Insurance
• Businessowners Policy (BOP)
Chapter 17 – Employee Benefits: Retirement Plans, pg 365
• Fundamentals of Private Retirement Plans
• Types of Qualified Retirement Plans
• Defined-Benefit Plans
• Defined-Contribution Plans
• Section 401(k) Plans
• Section 403(b) Plans
• Profit-Sharing Plans
• Retirement Plans for the Self-Employed
• Simplified Employee Pension
o SEP is a retirement plan where the employer contributes to an IRA established for each eligible employee; however the annual contribution limits are substantially higher
• SIMPLE (Savings Incentive Match Plan for Employees) Retirement Plans
o Less than 100 employees, employers are exempt from most nondiscrimination and administrative rules that apply to qualified plans
o Eligible Employees
 > $5,000 are eligible
o Employee Contributions
 Up to $11,00 before taxes
o Employer Contributions: Matching (dollar-for-dollar) or Nonelective contribution (2% of compensation for each eligible employee)
• Funding Agency and Funding Instruments
Chapter 16 – Employee Benefits: Group Life and Health Insurance, pg 337
• Meaning of Employee Benefits
• Fundamentals of Group Insurance
• Group Life Insurance Plans
• Group Medical Expense Insurance
• Traditional Indemnity Plans
• Managed Care Plans
• Consumer-Directed Health Plans
• Recent Development in Employer-Sponsored Health Plans
• Group Medical Expense Contractual Provisions
• Group Dental Insurance
• Group Disability-Income Insurance
• Cafeteria Plans

Chapter 24 – Other Property and Liability Insurance Coverage, pg 544

• ISO Dwelling Program
• Mobilehome Insurance
• Inland Marine Floaters
• Watercraft Insurance
• Government Property Insurance Programs
• Title Insurance
• Personal Umbrella Policy – Provides protection against catastrophic lawsuit or judgment

Basic Characteristics

  • Excess Liability Insurance – over underlying insurance contracts that apply
  • Broad Coverage – bodily injury and property damage, and personal injury
  • Self-insured Retention (typically $250 or higher) – Libel, slander, defamation of character, and a variety of additional claims
  • Reasonable Cost

ISO Personal Umbrella Policy

  • Basic Characteristics
    • Excess Liability Insurance
    • Broad Coverage
    • Self-Insured Retention
    • Reasonable Cost
  • ISA Personal Umbrella Policy
    • Persons Insured
    • Coverages
    • Exclusions

Chapter 23 – Auto Insurance and Society, pg 520

Approaches for Compensating Auto Accident Victims

o Financial Responsibility Laws
o Compulsory Insurance Laws
o Unsatisfied judgement funds
o Uninsured motorists coverage
o Low-cost auto insurance
o “No pay, no play” laws
o No-fault auto insurance

Auto Insurance for High-Risk Drivers

o Automobile insurance plan
o Joint underwriting association (JUA)
o Reinsurance facility
o Maryland Automobile Insurance Fund
o Specialty Insurers
• Cost of Auto Insurance
o Territory
o Age, gender, and marital status
o Use of the Auto
o Driver Education
o Good Student Discount
o Number and Types of Cars
o Individual Driving record
o Insurance Score
• Shopping for Auto Insurance
o Carry Adequate Liability Insurance (Most important Rule)
o Carry Higher Deductibles (for collision and other-than-collision losses)
o Drop Collision Insurance on Older Vehicles
o Shop Around for Auto Insurance
o Take Advantage of Discounts
 Multicar discount
 No accidents in three years
 Drivers over age 50
 Defensive driving course
 Antitheft device
 Antilock brakes
 Good student discount
 Auto and homeowners policy with same insurer
 College student away from home without a car
o Improve Your Driving record
o Maintain Good Credit
Chapter 22 – Auto Insurance, pg 492
• Overview of Personal Auto Policy (PAP)
• Part A: Liability Coverage
• Part B: Medical Payments Coverage
• Part C: Uninsured Motorist Coverage
• Part D: Coverage for Damage to Your Auto
• Part E: Duties After an Accident or Loss
• Part F: General Provisions
• Insuring Motorcycles and Other Vehicles
Chapter 20 – Homeowners Insurance, Section I, pg 437
• Homeowners Insurance
o Eligible Dwellings
o Overview of Homeowners Policies
• Analysis of Homeowners 3 Policy (Special Form)
• Section I: Coverage
• Section I: Perils Insured Against
o Dwelling and Other Structures
o Personal Property (Coverage C) – Named peril basis: fire or lightning, windstorm or hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, vandalism or malicious mischief, theft, falling objects, weight of ice, snow, or sleet, volcanic eruption
• Section I: Exclusions
o Ordinance or Law; Earth Movement; Water Damage; Power Failure; Neglect; War; Nuclear Hazard; Intentional Loss; Governmental Action; Weather Conditions; Acts or Decisions; Faulty Design
• Section I: Conditions
• Section I and II: Conditions
Chapter 21 – Homeowners Insurance, Section II, pg 465
• Personal Liability Insurance
• Section II: Exclusions
• Section II: Additional Coverage
• Endorsements to a Homeowners Policy
• Cost of Homeowners Insurance

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