foundations in financial planning sm professional education program

©2012, College for Financial Planning, all rights reserved.

Module 8Introduction to Insurance

Foundations In Financial PlanningSM Professional Education Program

Learning Objectives

8–1: Describe types of personal risk.

8–2: Identify risk management techniques used in a situation.

8–3: Analyze a situation to determine the method of risk management used.

8–4: Describe rules of risk management.

8–5: Define components of an insurance policy or an insurance term.

8–6: Distinguish between the functions of insurance agents and insurance brokers.

8–7: Describe characteristics of various forms and coverages in the homeowners series.

8–8: Describe terms or characteristics of a Personal Automobile Policy (PAP).

8–9: Describe characteristics of umbrella liability coverage.5-2

Questions To Get Us Warmed Up

7-3

Types of Personal Risk

• Loss of income• Unemployment• Disability• Death• Divorce• Catastrophic losses

8-4

Risk Management Techniques• Risk retention• Risk avoidance• Risk reduction• Risk sharing• Risk transfer

8-5

Rules of Risk Management

• Don’t risk more than you can afford to lose.

• Consider the odds.• Don’t risk a lot for a little.

8-6

Four Types of Pure Risk

• Personal• Property• Liability• Failure of others

8-7

Criteria for an Insurable Risk• Law of large numbers• Accidental loss• Definite and measurable loss• Loss must not be catastrophic

8-8

The Insurance ContractFour legal requirements• Legal activity• Offer & acceptance• Consideration/payment• Competent partiesContract terms• Insurable interest• Aleatory• Unilateral vs. bilateral• Indemnity• Contract of Adhesion

8-9

Insurance Policy Components• Declaration• Insuring

agreements• Exclusions• Conditions• Riders• Endorsements

8-10

Types of Insurance Companies

8-11

Agents & Brokers

8-12

Types of Insurance

• Life• Medical• Disability• Long-term care• Property• Liability

8-13

Homeowners Perils Covered

Basic coverage• 11 perils

Broad form coverage• same as basic + additional perils

Open perils coverage (formerly all risks)• all perils unless

specifically excluded

8-14

Types of Policies

8-15

Policy Type

Coverage A: Dwelling

Coverage B: Other Structures

Coverage C: Personal Property

Coverage D: Loss of Use

HO 02 (Broad)

Broad Form Broad Form Broad Form Broad Form

HO 03 (Special)

Open Peril Open Peril Broad Form Open Peril

HO 04 (Renters)

Not covered Not covered Broad Form Broad Form

HO 05 (Special)

Open Peril Open Peril Open Peril Open Peril

HO 06 (Condo Owners)

Minimal Included in A Broad Form Broad Form

HO 08 (ACV)

Basic Basic Basic Basic

Automobile Insurance Policies• Part A: liability coverage• Part B: medical payments• Part C: uninsured motorist coverage• Part D: coverage for damage to your

automobile• Part E: duties after an accident or loss• Part F: general provisions

8-16

Umbrella Liability Coverage• Protects against both automobile and

general liability• Is coupled with a minimum amount of

liability coverage in both as a base amount

• homeowners and automobile policies

8-17

Question 1

A worker wearing a hard hat on a construction site represents which of the following methods of risk management?a. risk toleranceb. risk avoidancec. risk reductiond. risk transfer

8-18

Question 2

Which of the following are considered to be rules of risk management?I. Don’t risk a lot for a little.II. The loss must not be catastrophic.III. Don’t risk more than you can afford to

lose.IV. Consider the odds of the event

occurring.a. I onlyb. I and III onlyc. II and IV onlyd. I, III, and IV only

8-19

Question 3

Charlie Bucket is interested in insuring against a number of risks he sees around him that cause him concern. Which one of the following would be considered an insurable risk?a. his neighbor’s houseb. his fiancé’s lifec. his boss’s automobiled. his son’s second grade teacher

8-20

Question 4

JoAnna Jett has asked you to explain the different types of life insurance companies and life insurance policies. As JoAnna’s insurance advisor, which of the following will you tell her?a. A mutual company can never sell a non-

participating policy.b. A stock company can never sell a

participating policy.c. A mutual company can sell a non-

participating policy.d. A stock company is owned solely by the

policy holders.8-21

Question 5

Sam Smith has an insurance policy that he took out when he bought his home for $100,000 five years ago. At the time, Sam purchased enough property insurance coverage to meet the 80% coinsurance requirement with a $1,000 deductible. Today, with the original amount of insurance still in force, his home is valued at $150,000. This morning Sam had a kitchen fire that caused $15,000 worth of damage. As the adjuster, what are you able to tell Sam when he asks how much he will be paid?a. $9,000b. $10,000c. $12,000d. $14,000

8-22

Question 6

Which one of the following ISO policy forms increases the coverage on personal property from broad coverage to open-perils coverage on an HO 00 03 policy?a. HO 00 04b. HO 00 06c. HO 00 07d. HO 00 15

8-23

Question 7

Your client, John Jones, has an auto policy with a 100/300 split limit of liability. John caused an accident with another vehicle in which four other people were riding. Each of the four were injured and acted to bring suit against John for $100,000 each. John’s insurer defended the suit at a cost of $18,000. What is the maximum amount that Jon’s policy will pay for this claim?a. $100,000b. $300,000c. $318,000d. $418,000

8-24

©2012, College for Financial Planning, all rights reserved.

Module 8End of Slides

Foundations In Financial PlanningSM Professional Education Program