Questions and Answers
Self-insurance involves actively setting aside money to fund any losses should that occur.
True
Convenience factors are not a consideration in choosing an overall risk management tool.
False
Longevity risk refers to the possibility of living beyond normal expectations.
True
Medigap insurance pays for all portions of medical expenses covered by the government.
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Tangible assets that households own are classified as real assets.
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Maintenance expenses can be classified as intangible liabilities.
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Search costs include the costs incurred by a person to find out which insurance policy is best.
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Disability insurance provides payments to replace income of the insured when incapacitated.
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All types of providers of insurance to individuals include only private insurance companies.
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Group policies are often offered at reduced premiums due to low marketing costs.
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Individual insurance policies provide no advantages compared to other forms of insurance.
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Financial strength is an important criterion when assessing the quality of an insurance company.
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The probability of payout by the insurance company is higher for group policies.
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Both health and integrity of pension assets are risks associated with human-related assets.
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Anticipated gifts can be offset by precautionary savings as a risk management tool.
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All of the factors listed are part of an insurance policy.
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Future education costs for children are an adjustment required for a needs analysis.
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Partial replacement is not considered an approach to assess insurance needs.
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Variable term life is a major type of life insurance.
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Renewable term refers to the guarantee that a policy will continue in force for a stated period.
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Repayment of the mortgage is not relevant when analyzing overall living costs.
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None of the options listed qualify as approaches to assess insurance needs.
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All of the above mentioned are risks associated with human-related assets.
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A convertible term policy allows an insured to swap for a whole life policy in the future.
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Higher payments in a whole life policy are for covering only the mortality risk.
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The policy designed to commonly pay a cash benefit to the beneficiary is a term policy.
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Diversification is a risk management approach that aims to reduce the impact of an unfavorable outcome for any one asset.
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Life insurance is designed solely to cover disability-related expenses.
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Retaining risk means choosing to absorb potential losses without reducing or eliminating risk.
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The risk management process includes identifying risks and eliminating them completely.
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One common approach to risk management is to avoid risks altogether.
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In practice, risk is viewed as the probability of an outcome below expectations.
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Study Notes
Risk Management Approaches
- Common risk management approaches include avoiding, reducing, retaining, sharing, and transferring risk.
- Avoiding risk means eliminating exposure entirely, while reducing risk aims to lessen potential hazards.
- Retaining risk involves accepting potential loss due to uninsurable situations.
- Diversification helps mitigate negative impacts on assets due to poor performance of one.
- Transferring risk assigns the possibility of loss to another party, such as through insurance.
- Sharing risk is a combination of transferring some risk while retaining part of it.
Self-Insurance
- Self-insurance is defined as actively setting aside funds to cover potential losses.
Factors in Risk Management Tools
- Key factors determining appropriate risk management tools include costs, likelihood and amount of loss, and personal risk tolerance.
- Convenience factors are not essential in choosing the right risk management tool.
Longevity and Human-Related Risk
- Longevity risk encompasses both the possibility of living longer than expected and dying prematurely.
- Common risks associated with human-related assets include health, disability, and economic risks, excluding longevity-related risks.
Medigap Insurance
- Medigap insurance covers medical expenses not addressed by government programs.
Asset Classification
- Tangible assets owned by households are categorized as real assets, while human and financial assets represent different classifications.
Maintenance Expenses
- Maintenance expenses are considered tangible liabilities for households.
Inefficiencies in Insurance Products
- Inefficiencies in insurance can arise due to overhead, search costs, underwriting costs, and incomplete information.
Search Costs
- Search costs refer to expenses related to finding the most suitable insurance policy.
Types of Insurance Policies
- Major types of insurance policies include private personal, private property, and government insurance, with limited renewal not being a recognized category.
Disability Insurance
- Disability insurance replaces income for individuals who become incapacitated.
Insurance Providers
- Major insurance providers include government entities and private companies offering group and individual policies.
Group Policies
- Reduced premiums for group policies stem from low marketing costs and mass efficiency.
Individual Insurance Policy Advantages
- Advantages of individual insurance policies include flexibility, portability, and tax benefits.
Evaluating Insurance Companies
- Criteria for assessing insurance providers involve financial strength, operational effectiveness, and company size.
Gifts and Anticipated Risks
- Anticipated gifts can be managed through precautionary savings or maintaining relationships with asset owners.
Insurance Policy Components
- Essential components of an insurance policy include mortality charges and investment returns.
Needs Analysis Adjustments
- Adjustments in a needs analysis account for factors such as living costs, educational expenses, and mortgage repayment.
Insurance Coverage Types
- Various insurance categories provide distinct types of coverage:
- Life insurance offers death benefits to named beneficiaries.
- Disability insurance replaces lost income due to incapacity.
- Long-term care support assists elderly individuals needing care.
- Health insurance reimburses medical expenses.
- Property and casualty insurance covers loss or damage to property.
- Personal liability insurance protects against various personal liabilities.
- Unemployment insurance supplies income during job loss.
- Social Security aids in retirement, disability, and surviving dependent benefits.
- Welfare programs support low-income individuals, including food and medical assistance.
Risk Management and Portfolio Concepts
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Identifying a group of assets to eliminate portfolio risk is challenging due to:
- Limited asset types available to individual investors.
- Inability to hedge lifetime income streams known as human assets.
- Portfolio return volatility over time.
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Households revise portfolios to develop a risk/return strategy that:
- Minimizes risk while maintaining living standards.
- Avoids audits by tax authorities.
- Optimizes income for the highest possible standard of living.
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Risk can be viewed as:
- Probability of a loss or underperforming outcome.
- Inability to hedge against losses.
- Likelihood of more unfavorable outcomes than favorable ones.
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Risk management is defined as:
- Identifying risks and controlling them to achieve personal goals.
- Not eliminating risks entirely but managing exposure effectively.
Risk Management Process
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The third step of the risk management process involves:
- Matching appropriate tools to the identified risks.
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Common risk management approaches include:
- Avoiding, reducing, retaining, and sharing risk.
- Strategies adapt based on the specific circumstances of the risk.
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Self-insurance is characterized by:
- Setting aside funds proactively for potential losses.
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Factors influencing the choice of risk management tools comprise:
- Costs, likelihood of loss, convenience, and personal risk tolerance.
Human-Related Assets and Longevity Risks
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Risks linked to human-related assets include:
- Longevity (premature death and extended life).
- Health issues and disabilities.
- Economic risks at both macro and micro levels.
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Longevity risk entails:
- The possibility of living longer than expected or dying prematurely.
Insurance Insights
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Medigap insurance covers:
- Medical expenses not reimbursed by government programs.
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Tangible assets owned by households are categorized as:
- Real, human, and financial assets.
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Maintenance expenses represent:
- Tangible liabilities affecting overall financial health.
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Inefficiencies in insurance products stem from:
- Overhead, search, and underwriting costs as well as incomplete information.
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Search costs describe:
- Expenses incurred by insured individuals to find optimal policies.
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Major insurance policy types include:
- Private personal, property, and government coverage.
Insurance Policies and Providers
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Categories providing replacement income for the incapacitated include:
- Disability insurance.
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Major providers of insurance consist of:
- Government and private companies through group and individual policies.
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Group policies often have reduced premiums due to:
- Lower marketing and administrative costs, benefiting from mass volume.
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Individual insurance policy advantages entail:
- Flexibility, portability, and potential tax benefits.
Insurance Assessment and Life Insurance
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Quality assessment criteria for insurance companies involve:
- Financial strength, operational effectiveness, and size.
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Human-related risk factors include:
- Health and integrity of pension assets.
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Risk management tools for anticipated gifts consist of:
- Precautionary savings and diversification strategies.
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Key components of insurance policies usually encompass:
- Mortality charges and investment returns.
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Life insurance types distinguished include:
- Term, whole, universal, and variable life policies.
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A policy's guarantee to remain in effect irrespective of insured health is termed:
- Renewable term.
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Whole life policy strengths include:
- Stable premiums, effective savings components, and consistent cash benefits.
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Description
Test your knowledge of risk management approaches, including self-insurance and various strategies to mitigate risk. This quiz will challenge your understanding of key concepts and definitions in the field of risk management.
