HACE Exam 3

  1. What is the capital city for insurance?
    DesMoines, Iowa
  2. How much money goes to paying insurance in the US?
    1 of every $12
  3. Risk
    • The possiblity of experiencing harm, suffering, danger, or loss
    • In insurance: Uncertainty with respect to economic loss
    • ie- Lost wages
  4. Risk Aversion Theory
    • Rational ppl will try to reduce or avoid risk
    • Risk is subjective in that indiv's define the level of risk & uncertainty they can handle
  5. Probability
    A person weighing uncertainty & risk is judging the probability (likelihood) of a good or bad outcome
  6. Ways to Deal with Risk
    • Avoidance (ie- don't drive)
    • Reduction (loss prevention; ie- use seat belts)
    • Assumption (ie- accept a certain level of risk)
    • Insurance (share risk; recover economically)
  7. Pooling
    Individuals share their financial risks to reduce catastrophic lisses from death, accidents, or health problems
  8. Premium
    The monthly cost of an insurance policy
  9. Face Value
    • Life insurance
    • The benefit due upon death
  10. Insured
    • Life insurance
    • The person whose life is covered by the policy
  11. Policy Owner
    • Life insurance
    • The indiv. or business that pays for & owns the policy
  12. Beneficiary
    • Life insurance
    • The recipient of the benefit upon the death of the insured
  13. Life Ins. May Not be Necessary for...
    • Singe person w/ no dependents
    • DINKS (double-income, no kids)
    • Married but unemployed w/ no dependents
    • Retired people
  14. Life Ins May be Necessary for...
    • Those w/ dependents
    • Married, single-income w/ dependents
    • Business owners
    • Those whose estate exceeds the estate tax-free transfer threshold ($1 million)
  15. What is the estate tax-free transfer threshold?
    $1 million
  16. 2 Methods of Determining Life Ins. Needs
    • Earnings Multiple Approach
    • Needs Approach
  17. Earnings Multiple Approach
    • Used to determine life ins. needs
    • To replace annual salary stream of breadwinner for x years
    • Normally 5-15 times gross salary is recommended
  18. Needs Approach
    • Used to determind life ins. needs
    • To meet the needs of the household after the death of a breadwinner, both current & in the future
    • Adjust salary down to compensate for reduction in household expenses
    • Adjust your plan annually b/c you have less time until retirement (the N in the formula)
  19. Adjust Salary Down
    • Life insurance
    • Part of needs approach
    • 5 to 4: 20% drop
    • 4 to 3: 22% drop
    • 3 to 2: 26% drop
    • 2 to 1: 30% drop
  20. The 7 Funds of the Needs Approach
    • Immediate needs funds (burial, etc.)
    • Debt elimination funds
    • Immediate transitional funds
    • Dependency funds
    • Spousal life income funds
    • Educational funds for child or spouse
    • Retirement income funds
  21. Calculating the Needs Approach
    • Add all funding needs to determine total need
    • Subtract current ins. coverage & other available assets (whatever else you have in place to support your family)
    • This determines amount of add'l ins. coverage necessary
  22. Term Insurance
    • Life insurance
    • Death benefit coverage for a specific term of time
    • Only valid of the insured dies during the time of coverage
    • Least expensive form of life insurance
    • Everytime you renew, they do a physical, etc.
  23. Cash-Value Insurance
    • Life insurance
    • Provides a death benefit & an opportunity to accumulate savings
    • Provides permanent insurance
    • Three different types: Whole life ins., Universal life ins., and Variable life ins.
  24. Whole Life Insurance
    • Part of cash-value ins
    • Permanent protection
    • Fixed premium & death benefit
    • Fixed cash-value that grows tax-deferred
    • Much less death protection than term for the same price
    • Yield on cash value portion isn't competitive w/ yields on alternative investments
  25. Universal Life Insurance
    • Part of cash-value ins.
    • Permanent protection
    • Flexible premium payments
    • Flexible death benefits
    • Cash-value fluctuates depending on the amount paid into the policy
  26. Variable Life Insurance
    • Part of cash-value ins.
    • Premanent protection
    • Returns are earned on a tax-deferred basis
    • Allows for either a fixed (straight variable) or flexible (variable universal) premium
    • Fleixble death benefit & fluctuating cash value (reflecting the mutual fund investment performance)
    • Can take a loan out against it
  27. Lump-Sum Settlement
    • Life ins.
    • One time payout upon death of the insured
  28. Interest-Only Settlement
    • Life ins.
    • Periodic payments of the interest earned by the principal
  29. Installment-Payments Settlement
    • Life ins.
    • Periodic payments, normally for a fixed period, of both the principal & interest
  30. Life Annuity Settlement
    • Life ins.
    • Periodic payments of both the principal & interest that continue for the life of the beneficiary
  31. How much did the US spend on health insurance in 2009?
    About 17% of the GDP (2,500,000,000,000)
  32. What was the annual premium in 2009 for health insurance?
  33. How many Americans have filed bankruptcies for medical reasons?
    500,000 (that's 40%!!)
  34. Basic Health Insurance
    • Hospital Insurance
    • Surgical Insurance
    • Physician Expense Insurance
  35. Hospital Insurance
    • Basic health ins.
    • Covers hospitalization expenses (room fees, nursing fees, & drug fees)
  36. Surgical Insurance
    • Basic health ins.
    • Covers only the direct costs of the surgery incl. the surgeon's fees & equipment fees
  37. Pysician Expense Insurance
    • Basic health ins.
    • Covers physicans' fees incl. office fees, lab fees, and x-ray fees
  38. Major Medical Insurance
    • Covers costs beyond the basic plan
    • Normally requires co-payments & deductible payments
    • Stop-loss provision (limits the total out-of-pocket expenses incurred by the insured to a specific dollar amount)
    • Lifetime cap (total amt. the ins. co. will pay over the life of a policy)
  39. Stop-Loss Provision
    • Part of major medical ins.
    • Limits the total out-of-pocket expenses incurred by the insured to a specific dollar amt
  40. Lifetime Cap
    • Part of major medical ins.
    • Total amt. the ins. co. will pay over the life of a policy
  41. Dental & Eye Insurance
    • Eye exams, Glasses, Contacts, Dental work, Dentures
    • Expensive unless provided thru employer plan
  42. Dread Disease & Accident Insurance
    • Covers only specific illness or accidents
    • Provides a set dollar amt for reimbursement
  43. Private Health Care Plans
    • Fee-for-service or traditional indemnity plans
    • Managed health care
  44. Fee-for-Service or Traditional Indemnity Plans
    • Private health care plan
    • Provides greatest choice
    • Coinsurance (ie- 90/10)
    • Co-payment or deductible (meet deductible before ins. pays anything)
    • Relatively expensive & require more paperwork
  45. Bigger Deductible = ??
    Smaller premium!!
  46. Managed Care Plan
    • Pays for & provides health care services to policy holders
    • Limits choices
    • Monthly premium & co-payment
    • HMOs & PPOs
  47. HMOs
    • Health Maintenance Organizations
    • Managed health care plan
    • Most popular form
    • A system of doctors & hospitals for a flat fee
    • 3 types: Individual practice association plans, Group practice plans, Point-of-service plans
  48. PPOs
    • Preferred Provider Organizations
    • Managed health care plan
    • A cross btw. fee-for-service plans & HMO plans
    • A group of doctors, which work @ a reduced cost
    • Add'l fees if use a non-member doctor or center
  49. Individual Insurance
    • Health insurance
    • Provides an expensive, tailor-made policy to the purchaser
    • Shop around
  50. Government-Sponsored Health Care Plans
    • Worker's Compensation
    • Medicare
    • Medicaid
  51. Worker's Compensation
    • Ins. to workers injured on the job
    • Payment for work-related accidents & injuries
    • Coverage is deter. by state law & varies by state
    • Go to your employer's doctor, not your own
  52. Medicare
    • Medical benefits to disabled & those 65+
    • Cost is covered thru SS tax
    • Divided into 2 parts- A & B
  53. Medicaid
    • Health care for low income, blind, or aged ppl
    • Payments may be used to offset the premiums, deductibles, & co-payments incurred w/ Medicare
  54. Health Ins. for Employees
    • Flex accounts
    • Disability insurance
  55. Medical Reimbursement or Flexible Spending Account
    • Funded w/ pre-tax dollars
    • Pays reiumbursed medical expenses
    • Very flexible, but some expenses aren't eligible for coverage
    • Use it or lose it!
    • Need to know how much you spend each year- lose it all if you don't use it all!!
  56. Disability Insurance
    Provides income in the event of a long-term loss or injury
  57. Long-Term Care Insurance
    • Provides a daily dollar benefit for the costs of long-term care
    • Expensive
    • Covers help in your home, community activities (like adult day care), assisted living, visiting nurses, & care in a nursing home
  58. Property Insurance
    Coverage that protects real & personal property from catastrophic losses
  59. Liability Insurance
    Protects against the financial consequences from the insured's responsibility for property losses or injuries to others
  60. Peril
    • The cause of a loss
    • ie- tornado, fire, negligence
  61. Deductibles
    Limit what a company must pay for small losses
  62. Replacement Cost
    The amt. necessary to repair, rebuild, or replace an asset at today's prices
  63. Premiums
    The amt. you pay for your ins. coverage
  64. HO-1
    • Basic Form HO Ins
    • Provides the most ltd. coverage
    • Covers fire, lightning, tornados, explosions, riots, vandalism, theft, volcanic eruptions
  65. HO-2
    • Broad-Form HO Ins
    • Covers only named perils (ie- weight of snow, freezing, falling objects)
  66. HO-3
    • Special Form HO Ins
    • Covers all direct physical losses to your home - open perils protection
    • Exceptions incl floods, wars, earthquakes, & nuclear accidents
  67. HO-4
    • Renter's Ins
    • Covers property rather than the dwelling
    • Provides liability coverage in case an accident, causing damage to the structure, is your fault
  68. HO-6
    • Condo Owner's Ins
    • Similar to HO-4 (renters)
    • Covers improvements you've made to the dwelling unit
  69. HO-8
    • Older Homes HO Ins
    • Insures the dwelling for the repair cost or market value, instead of the replacement value
  70. Coverage A: Dwelling
    • Protects the dwelling & any attachments
    • Doesn't cover damage to the land
  71. Coverage B: Other Structures
    • Protects unattached dwellings on the property
    • Covers landscaping, but not the land
    • Doesn't cover structures used for business purposes
  72. Coverage C: Personal Property
    • All personal property owned or used by the policyholder
    • Regardless of its location (ie- students away at college)
    • Covers property of guests in your home
  73. Coverage D: Loss of Use
    Covers losses incurred as a result of your home being uninhabitable
  74. Personal Liability Coverage
    • Protects policyholder in case someone's injured on their property
    • Doesn't cover business or professional liability or negligence
  75. Supplemental Coverage (Endorsements)
    Personal article floaters (above & beyond)
  76. Personal Article Floaters
    Above & beyond what's normal (ie- $500,000 e-ring)
  77. Umbrella Policies
    Cover liability costs after the underlying HO's policies have been exhausted
  78. Liability Insurance
    The only ins you need if your car is fully pd off
  79. Comprehensive Insurance
    • Full coverage
    • Applies when you still owe money on your car
  80. Policy Provisions
    The terms/conditions of your coverage
  81. PAP Part A: Liability Coverage
    • Covers bodily injury & property damage
    • Can be combined single limit or split-limit coverage
    • Covers losses due to a lawsuit
  82. Auto Liability Split-Coverage
    • 100/300/50
    • per person / total medical / property damage
  83. Auto Liability Combined Single Limit Insurance
    • Both bodily injury & property damage
    • Doesn't designate what money goes to pay for which damage
  84. PAP Part B: Medical Expenses
    • Covers all reasonable medical costs & funeral expenses incurred
    • Within 3 years of the accident
  85. PAP Part C: Uninsured Motorist Protection
    • Provides coverage if injured by an uninsured motorist or a hit-and-run driver
    • Other driver must be at fault to collect
    • Also covers costs in excess of other person's coverage
  86. PAP Part D: Comprehensive Physical Damage Coverage
    • Collision loss
    • Regardless of fault
  87. No Fault Insurance
    • Your ins pays for your losses & theirs pays for theirs
    • Helps cut down on legal fees b/c no one is responsible
  88. Gap Insurance
    Pays the diff btw the vehicle's value & what you might still owe on the loan
  89. Investing
    Putting $ into an asset that generates a return
  90. Speculating
    • Putting $ into an asset that the FV (or return) relies on supply & demand
    • Guesswork
  91. Lending Investments
    • Savings acct
    • Bonds
  92. Bond
    Lending acct where your rate of return is predetermined
  93. Stock
    You become part owner in the corporation & receive a portion of the profits as dividends
  94. Real Estate
    You generate a return thru rent or capital appreciation
  95. Rate of Return Equation
    • (ending value- beg. value) + income
    • beg. value
  96. Annualized Rate of Return Equation
    • (ending value - beg. value) + income * 1/4
    • beg. value
  97. Inflation Risk Premium
    Compensation for the anticipated inflation over the life of an investment
  98. Default Risk Premium
    Compensation for the possibility that the issuer may not pay the interest or repay the principal
  99. Maturity Risk Premium
    Compensation for longer-term bonds for value fluctuations in response to interest rate changes
  100. Liquidity Risk Premium
    Compensation for a bond that can't be quickly converted into cash at fair market value
  101. Interest Rate Risk
    • Risk associated w/ fluctuations in security prices due to changes in the market interest rate
    • A rise in market interest rate reduces the value of your lower rate security
    • Impossible to eliminate
  102. Inflation Risk
    • Risk that rising prices will erode purchasing power
    • Almost impossible to eliminate
  103. Business Risk
    The risk assoc. w/ poor company management or product acceptance in the marketplace
  104. Financial Risk
    The risk assoc. w/ the company's use of debt
  105. Liquidity Risk
    Risk assoc w not being able to liquidate a security quickly & cost effectively
  106. Market Risk
    Risk assoc w/ swings in the overall market
  107. Political & Regulatory Risk
    How bills & laws impact our investing
  108. Call Risk
    • Risk that a callable security may be taken back before maturity
    • Only applies to callable bonds
  109. Systematic Risk
    Risk assoc w/ all securities & can't be reduced through diversification
  110. Unsystematic Risk
    Risks assoc w/ 1 particular investment & can be reduced thru diversification
  111. Security
  112. Primary Market
    • We don't get these
    • For new (first) issues
  113. Initial Public Offerings
    • Primary market
    • 1st time the company's stock is traded publicly
  114. Seasoned New Issues
    • Primary market
    • New shares being issued by a company that's already publicly traded
  115. Underwriting
    • Gtd. minimum per stock
    • They sell for more to make $
  116. Secondary Markets
    Trade previously owned shares of stock
  117. Big Board
  118. OTC Market
    • "Over the Counter" Market
    • Secondary market
    • Computer network of dealers
  119. Market Specialists
    In charge of their stocks to make sure order is maintained
  120. Bid Price
    Price the buyer is willing to pay for the shares
  121. Asked Price
    Price the seller will sell the shares for
  122. Spread
    • Where the $ is made
    • They make the seller & buyer come to an agreement
    • Make commission
  123. Discretionary Acct
    • Broker authorized to make trades for you
    • Use caution! Some participate in churning to make more $$
  124. Round Lots
    Orders of 100 shares
  125. Odd Lots
    Orders of 1-99 shares
  126. Day Orders
    Good until the end of the trading day
  127. Open Orders (GTC)
    Good until filed or cancelled
  128. Fill or Kill Orders
    Must be filled or cancelled immediately
  129. Market Orders
    An order to sell or buy a specific # of shares @ the best avail. price
  130. Limit Orders
    An order to sell or buyh a specific # of shares @ a certain price or better
  131. Stop (or stop-loss) Orders
    An order to sell a specific # of shares if the stock falls below x price or buy a specific # of shares if the stock rises above x price
  132. Securities Act of 1933
    Requires disclosure of relevant financial info in a timely manner
Card Set
HACE Exam 3
HACE 3200 Exam 3