Questions and Answers
What describes pure risk?
Who is the beneficiary in a life insurance policy?
What is a mortality table used for?
Which principle helps insurers calculate probabilities related to large groups?
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What happens to premium rates if mortality decreases?
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Which type of premium remains consistent throughout the policy's duration?
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What factors can lead to an increase in premium amounts?
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What is the role of net premium in insurance calculations?
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Which type of risk involves a possibility of gain?
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What role does the policy owner play in a life insurance contract?
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How does high mortality affect premium amounts?
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Which of the following is true about level premiums?
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What is the purpose of the Law of Large Numbers in insurance?
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What does the face amount refer to in an insurance policy?
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What primarily constitutes an insurance company’s source of income?
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Which factor will cause premium rates to increase?
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What is meant by net premium in insurance calculations?
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What is the primary difference between natural premiums and level premiums?
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Study Notes
Key Insurance Principles
- Risk Sharing: Involves pooling risks among a group to exchange uncertainty for certainty regarding potential losses.
Types of Risks
- Pure Risk: Entails risks with no chance of gain; includes examples like death, disability, or aging.
- Speculative Risk: Involves risks with three possible outcomes: loss, gain, or no change; commonly illustrated through activities like gambling or running a business.
Fundamental Insurance Terms
- Insured: The individual whose life or interests are covered by the insurance policy.
- Beneficiary: The entity or person designated to receive life insurance benefits upon the insured's death.
- Policy: The official written contract outlining the agreement between the insured and the insurance carrier.
- Policy Owner/Payor: The individual responsible for paying premiums and owning the insurance policy.
- Face Amount: The specified sum paid to the beneficiary upon the insured's death.
- Premium: Regular payments required to maintain policy coverage.
Premium Rate Factors
- Mortality Table: A statistical chart indicating the death frequencies within specific age groups.
- Life Expectancy: An average prediction of how long individuals are expected to live, derived from mortality data.
- Law of Large Numbers: A statistical principle utilized in insurance to establish likelihood and probability estimates.
- Principle of Probability: Used to calculate the chances of an individual surviving over a set period.
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Premium Variations:
- High mortality rates lead to increased premiums.
- Low mortality rates result in decreased premiums.
- Increased expenses cause premium hikes.
- Decreased expenses allow for lower premiums.
- High investment interest earnings contribute to lower premium rates.
- Low investment interest earnings necessitate higher premium rates.
Insurance Company's Income Sources
- Main revenue originates from premium income and investment earnings.
Gross Premiums Computation
- Net Premium: Calculated by assessing the contractual liabilities while accounting for future premium obligations; includes considerations for mortality rates, safety margins, and interest assumptions.
Types of Premium Structures
- Natural Premiums: Premiums that rise as the insured ages.
- Level Premiums: Premiums that remain constant throughout the duration of the policy.
Basic Insurance Principles
- Risk Sharing involves pooling risks among a group, turning uncertainty into certainty through collective responsibility for losses.
Types of Risks
- Pure Risk: Involves scenarios with no potential for gain, e.g., death, disability, aging.
- Speculative Risk: Entails three outcomes: loss, gain, or no change, e.g., gambling or entrepreneurial ventures.
Basic Insurance Terms
- Insured: The individual whose life is covered by a policy.
- Beneficiary: Recipient of life insurance proceeds upon the insured's death.
- Policy: A formal contract between the insured and the insurance provider.
- Policy Owner/Payor: The individual responsible for paying the policy premiums and owning the policy.
- Face Amount: The sum paid to the beneficiary after the insured's death.
- Premium: Regular payments made to maintain the insurance policy's validity.
Premium Rate Factors
- Mortality Table: Displays the death rates of individuals at various ages.
- Life Expectancy: An estimate of the average lifespan of a person based on mortality data.
- Law of Large Numbers: A statistical principle used to predict outcomes in insurance by analyzing large data sets of similar occurrences.
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Principle of Probability: Assesses the likelihood of an individual surviving over a specified period.
- Higher mortality rates lead to increased premiums.
- Lower mortality rates lead to decreased premiums.
- Increased expenses drive up premium rates.
- Decreased expenses can lower premium rates.
- High interest earnings can lead to lower premium rates.
- Low interest earnings can increase premium rates.
Insurance Company Income Sources
- Income primarily derived from premium payments and investment revenue.
Computation of Gross Premiums
- Net Premium: Reflects the actual cost of insurance, considering future premiums, mortality, safety margins, and interest assumptions.
Types of Premiums
- Natural Premiums: Premiums that increase as the insured ages.
- Level Premiums: Premiums that remain constant throughout the life of the policy.
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Description
Explore the foundational principles and history of insurance concepts, including risk sharing and types of risks. This quiz covers fundamental terminology and distinctions between pure and speculative risks. Test your knowledge on basic insurance terms and their relevance.
