exposure to risks that have opportunity for loss and no opportunity for gains

Insurable

• Car accident
• Fire
• Typically very random
• Accidental, unintentional 

Exposure to a risk of loss or gain

Uninsurable

• Certain types of investments
• Gambling
• Starting a business

• Dying
• Getting sick or injured
• Becoming Disabled
• Victim of crime
• Professional malpractice
• Running out of money
• Auto - theft, injury, medical expenses
• Home - theft, natural disaster or peril, liability for injury on prop.

Avoid the risk

Do not expose yourself to it

Ex. "Do not drive, do not smoke"

Reduce the risk

Take action to reduce frequency or severity of risk

Ex. clear your sidewalks of snow (frequency)

wear a seatbelt (severity)

Transfer the Risk

Contractually pass it on to another

Ex. Insurance, Hold Harmless agreement

Retain the Risk

Play to pay the cost if the loss occurs

Ex. Health insurance deductible

Any time you fail to recognize existence of risk

Chance of exceeding the dollars in pool

Hard to get members to pay extra later

Pools likely to have correlated risks

defn: fee that insurers charge for assuming risk

Include the following:

• share of expected loss for pool
• risk charge (to cover risk that actual losses deviates from expected losses)
• expenses (commissions, office)
• profit to shareholders

To ensure that pool members have similar expected losses

(ex: where you live/how you drive)

Without, pools would only have bad risks

Correlated Risks: natural disasters, war, terrorism

Non-Random Risks: intentional acts

Unpredictable Risks: environmental damage; medical malpractice

supposed to be written to be understood by an average person

ambiguities are construed against the insurer

1. Risk of damage to the structure (fire, rain)
2. Risk that property will be stolen or damaged by others
3. Risk of liability-- being sued by another person's losses due to your negligence (swimming pool/fence)

1. you had a duty to another person
2. you failed duty
3. failure caused that person/their property a loss
4. you have no legal defenses

Liability without any proof of negligence.

Having a swimming pool that a kid falls into... you were not negligent-- "attractive nuissance"

& Dog Bites

1. Damage to house, trees, shrubs, property
2. Additional living expenses
3. Personal property in/away from home (car)
4. Personal property floater: high value item
5. Household inventory with documentation

• also called personal catastrophe policy
• supplements basic personal liability coverage
• $1,000,000 or more

1. Location and type of home
2. Amount of coverage and type (market value of structure, not land)
3. Discounts
4. Additional Coverages

1. Cost of item, not considering depreciation
2. May limit replacement cost to 400% of actual cash value of item
3. Costs 10-20% more than actual cash value coverage

1. Flood
2. sewer water damage
3. mold damage
4. replacement cost including limits
5. jewelry
6. artwork
7. furs
8. silverware/china

1. Personal property loss or damage
2. Additional living expenses
3. Personal liability
4. Building owner's insurance usually won't cover renter's personal property
5. Many renters do not have insurance even tho it is pretty cheap to buy

State specified automobile liability insurance laws

Requires drivers to prove their ability to cover the cost of damage or injury caused by them in an accident

1. 100k paid to one person in an accident (bodily)
2. 300k paid to all persons in accident (bodily)
3. 50k for payment for damage to property of others (property)

Fast, smooth method of paying for damages w/o taking legal action to determine fault

Takes a long time to recover out-of-pocket costs

1. pays for damage to your automobile regardless of who is at fault
2. if other person is at fault, company tries to collect from them first
3. limited to retail value of your vehicle

covers damage not caused by a collision (vandalism, fire, theft)

falling objects or hitting an animal

1. Careful review of fees/charges
2. Incentives for preventive care and services outside of hospital
3. involve community in health care needs
4. encourage prepaid group practices
5. support community health education

• compromise 90% of all health insurance
• most are employer sponsored
• 1996 Health Insurance Portability and Accountability Act

• Sept 08 to Dec 09
• Economic recession
• Employees pay 35% of the premium
• Employer subsidizes 65% of premium for up to 9 months in exchange for a tax credit

• basic coverage for hospital and doctor bills
• cover at least 120 days of hospital room and board
• provide at least $1million lifetime max for each family member
• limit out-of-pocket expense to $3,000-$5,000 (excludes dental, prescriptions, optical)
• impose no unreasonable exclusions
• pay at least 80% of out-of-pocket expenses after yearly deductable of 500-1,000 is met

covers expenses for serious injury or long-term illness

has a deductible, coinsurance, and stop-loss provision

• focus on unrealistic fears
• only pays out for specific conditions
• often sold by people on commision
• poor value

• pays a fixed amount for each day you are in the hospital
• best for people in high-risk groups

1. Eligibility- age, marital status, dependency
2. Assigned Benefits- insurance pays doctor directly
3. Internal Limits- fixed amount per day in hospital

Hospital and Medical Service Plans

Blue Cross

Hospital and Medical Service Plans

Blue Shield

prepaid health plan

primary care physician

1. contracts with select providers
2. fixed pre-paid monthly premium
3. focus on prevention
4. basic and supplemental services

Preferred Provider Organization

more expensive than an HMO because you have more choices/less restrictions

Federal program for those over 65

1. Hospital Insurance- compulsory
2. Medical Insurance- voluntary if proof of coverage
3. Medicare Advantage Program
4. Medicare Prescription drug benefit

Medigap- pays what medicare does not

Medicaid- for low income people of all ages, state administered

Reward of up to $1,000 if you

1. report suspected fraud
2. Inspecter general office reviews submission
3. Suspected fraud isnt already investigated
4. report directly leads to recovery of at least $100 of medicare money

1. Employer- group disability 
2. Social Security- if disability lasts longer than 12 months
3. Workers Comp- if injured at work or from result of work activity
4. Disability Insurance- benefits limited to 70-80% of takehome pay

Which of the following are common uses of life insurance proceeds?

Person who dies does not incur loss

Dependents incur losses

Life insurance creates an instant estate

protection from creditors

policy benefit is not subject to income tax

Your annual income is $50,000. What is your life insurance need based on the easy method?

Answer: $245,000

70% of annual income x 7 year adjustment period

more thorough than others

considers employer provided insurance, SS benefits, and income and assets

1. owned by shareholders
2. 75% are of this type
3. sell non-participating policies
4. if you want to pay the same premium each year, choose a non-participating w/ guaranteed premiums

1. owned by the policy-holders
2. 25% of this type
3. participating policies have higher premiums than non-participating
4. part of premiums is refunded to policyholders anually (this is called policy dividen)

1. protection for a specific period of time
2. if you stop paying premiums, coverage stops
3. Pays face amount to beneficiary during the policy period
4. no investment component
5. age-related premiums
6. you can renew policy without having a physical at end of term
7. multiyear level term: most popular form of term

1. pay premium as long as you live
2. amount of premium depends on age when you start policy
3. provides death benefits and accumulates cash value
4. you can borrow against cash value or draw it out at retirement

pay premiums for stipulated period (20-30 yrs) or until you reach 65

then your policy becomes "paid up" and you are insured for life

can pay premiums at any time in any amount

most flexibility

increase in cash value reflects interest earned on short-term investments

1. Naming your beneficiary and contingent beneficiaries

1. tax benefits make permanent products preferable
2. beneficiaries of life insurance pay no tax
3. "investment" of the cash value avoids taxation

1. tax benefits probably do not offset the costs
2. you are not credited with full value, even less in early years
3. very illiquid

1. lump-sum payment is most common
2. limited installment- equal payments over x years
3. life income option- payments to beneficiary for life
4. proceeds left with company, pays interest to beneficiary

financial contract written by insurance companies that provide regular income

tax advantages may apply (since insurance product)

those who expect to live longer benefit the most from annuities