Chartered Life Underwriter (CLU) Fundamentals of Insurance Planning Syllabus

Fundamentals of Insurance Planning syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Fundamentals of Insurance Planning in Chartered Life Underwriter (CLU), not a summary of it.

1. 1

   Risk and the Risk Management Process

   4 topics

   • Nature and Classification of Risk
     • Pure versus speculative risk
     • Static versus dynamic risk
     • Fundamental versus particular risk
     • Peril, hazard, and exposure distinctions
   • Steps in the Risk Management Process
     • Identifying and measuring loss exposures
     • Selecting risk treatment techniques
     • Implementation and monitoring
   • Risk Treatment Techniques
     • Avoidance and loss control
     • Retention and self-insurance
     • Risk transfer and insurance
   • Requisites of an Insurable Risk
     • Large number of homogeneous units
     • Definite and measurable loss
     • Catastrophe and adverse selection limits
2. 2

   Legal Principles of Insurance Contracts

   4 topics

   • Distinguishing Features of Insurance Contracts
     • Aleatory and unilateral nature
     • Contract of adhesion and good faith
     • Personal and conditional contracts
   • Doctrine of Insurable Interest
     • Insurable interest in life versus property
     • Timing requirements for interest
   • Principle of Indemnity and Subrogation
     • Indemnity and its limits
     • Subrogation and the collateral source rule
   • Agency Law and Authority
     • Express, implied, and apparent authority
     • Waiver and estoppel
     • Representations, warranties, and concealment
3. 3

   Property and Liability Risk Exposures

   4 topics

   • Homeowners and Personal Property Coverage
     • HO forms and covered perils
     • Replacement cost versus actual cash value
   • Personal Auto and Liability Exposures
     • Liability, collision, and comprehensive coverage
     • Uninsured and underinsured motorist coverage
   • Personal Umbrella Liability Policies
     • Excess limits and drop-down coverage
     • Underlying coverage requirements
   • Professional and Excess Liability Considerations
4. 4

   Government and Social Insurance Programs

   4 topics

   • Social Security Retirement and Survivor Benefits
     • Quarters of coverage and PIA
     • Family benefits and earnings test
   • Social Security Disability and Medicare Integration
   • Workers Compensation and Unemployment Insurance
   • Medicaid and Long-Term Care Public Programs
5. 5

   The Financial Planning Process and Ethics

   3 topics

   • Steps of the Financial Planning Process
     • Establishing the client relationship and gathering data
     • Analyzing, developing, and implementing recommendations
     • Monitoring and review
   • Code of Ethics and Professional Conduct
     • The American College Code of Ethics
     • Fiduciary and suitability standards
   • Regulation of Insurance and Advice
     • State insurance regulation and the NAIC
     • Securities and investment advice oversight

Fundamentals of Insurance Planning flashcards for Chartered Life Underwriter (CLU)

20 of 53 cards from the Fundamentals of Insurance Planning deck — real questions with worked answers.

1. What is the standard definition of "risk" in insurance, and how does it differ from "hazard" and "peril"?

   Risk is uncertainty concerning the occurrence of a loss. A peril is the actual cause of loss (e.g., fire, theft); a hazard is a condition that increases the chance or severity of a loss arising from a peril.

2. Distinguish pure risk from speculative risk and state which is generally insurable.

   Pure risk involves only the chance of loss or no loss (no chance of gain), e.g., death, fire. Speculative risk involves a chance of loss, no loss, or gain, e.g., gambling or investing. Only pure risk is generally insurable.

3. What is the difference between fundamental risk and particular risk?

   A fundamental risk affects the entire economy or large groups (e.g., war, inflation, natural disasters) and is often addressed by government programs. A particular risk affects only individuals (e.g., a house fire, an auto accident) and is the focus of private insurance.

4. Name the three classes of hazards and give an example of each.

   Physical hazard (a physical condition, e.g., icy sidewalk or stored explosives), Moral hazard (dishonesty/character, e.g., intentionally causing a loss to collect insurance), and Morale (attitudinal) hazard (carelessness or indifference because insurance exists).

5. List the steps in the risk management process in order.

   1) Identify loss exposures, 2) Analyze/measure the exposures (frequency and severity), 3) Select the appropriate risk treatment technique(s), 4) Implement the chosen technique(s), and 5) Monitor and review the program periodically.

6. In risk analysis, what are "loss frequency" and "loss severity," and why does severity usually dominate the insurance decision?

   Loss frequency is how often a loss is likely to occur; loss severity is how large a loss could be. Severity dominates because a high-severity loss (even if infrequent) can be financially catastrophic, making it the priority for risk transfer/insurance.

7. Name the major risk treatment (control and financing) techniques.

   Risk control: avoidance and loss control (loss prevention to reduce frequency, loss reduction to reduce severity). Risk financing: retention (self-funding) and transfer (primarily insurance, also non-insurance transfers like contracts).

8. Under the risk management matrix, which technique matches each combination of loss frequency and severity?

   Low frequency/low severity = retention; high frequency/low severity = retention plus loss control; low frequency/high severity = transfer (insurance); high frequency/high severity = avoidance.

9. What is the difference between loss prevention and loss reduction?

   Loss prevention aims to reduce the frequency (probability) of losses (e.g., installing burglar alarms). Loss reduction aims to reduce the severity (size) of losses that do occur (e.g., sprinkler systems, seat belts).

10. List the six requisites (ideal characteristics) of an insurable risk.

    1) A large number of homogeneous exposure units, 2) loss must be accidental and unintentional, 3) loss must be determinable and measurable, 4) loss should not be catastrophic to the insurer, 5) chance of loss must be calculable, and 6) premium must be economically feasible.

11. What is the "law of large numbers" and why is it essential to insurance?

    It is the principle that as the number of similar exposure units increases, the actual loss experience will more closely approach the expected (predicted) loss. It lets insurers predict losses accurately and set adequate premiums.

12. Why is a catastrophic (correlated) loss problematic for insurability, and how do insurers manage it?

    A catastrophe causes many insured units to suffer loss simultaneously, defeating the pooling/spreading mechanism. Insurers manage it through reinsurance, geographic diversification, catastrophe bonds, and policy exclusions (e.g., war, flood).

13. List the distinguishing legal characteristics (features) of an insurance contract.

    It is aleatory (unequal exchange of value), unilateral (only the insurer makes a legally enforceable promise), conditional (insured must meet conditions to collect), a contract of adhesion (take-it-or-leave-it, drafted by insurer), and a contract of utmost good faith (uberrimae fidei).

14. What does it mean that an insurance contract is "aleatory"?

    The dollar amounts exchanged are unequal and depend on chance: the insured may pay small premiums and collect a large claim, or pay premiums and collect nothing. Values exchanged are not equal, unlike a commutative contract.

15. Why is an insurance contract called a contract of "adhesion," and what legal rule benefits the insured as a result?

    It is drafted entirely by the insurer and offered on a take-it-or-leave-it basis. Because of this, any ambiguity in the contract is construed against the drafter (the insurer) in favor of the insured (contra proferentem).

16. List the four general requirements for a valid (legally enforceable) contract.

    1) Offer and acceptance (agreement), 2) consideration, 3) competent (legally capable) parties, and 4) legal purpose/object.

17. What is the doctrine of insurable interest, and what must it prevent?

    Insurable interest requires that the policyowner stand to suffer a genuine financial (or emotional, for close family) loss if the insured event occurs. It prevents insurance from being used as gambling and reduces moral hazard.

18. For life insurance versus property insurance, when must insurable interest exist?

    In life insurance, insurable interest must exist only at the inception (policy issue). In property/liability insurance, insurable interest must exist at the time of loss (and typically at inception as well).

19. State the principle of indemnity and its purpose.

    The principle of indemnity holds that the insured should be restored to approximately the same financial position after a loss as before it, but no better. Its purpose is to prevent profiting from insurance, limiting moral hazard.

20. Name contracts or provisions that are exceptions to (or support) the principle of indemnity.

    Life insurance and valued policies are exceptions (they are valued, not indemnity, contracts). Provisions supporting indemnity include insurable interest, subrogation, actual cash value, other-insurance clauses, and coinsurance.

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