Personal Finance Insurance and Risk Management Syllabus

Insurance and Risk Management syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Insurance and Risk Management in Personal Finance, not a summary of it.

1. 1

   Principles of Risk Management

   3 topics

   • Identifying Financial Risks
   • Risk Avoidance, Reduction, and Transfer
   • How Insurance Works
2. 2

   Health and Disability Insurance

   3 topics

   • Health Insurance Plans
   • Disability Insurance
   • Long-Term Care Insurance
3. 3

   Life Insurance

   3 topics

   • Term Life Insurance
   • Permanent Life Insurance
   • How Much Coverage You Need
4. 4

   Property and Liability Insurance

   3 topics

   • Homeowners and Renters Insurance
   • Auto Insurance
   • Umbrella Liability Insurance

Insurance and Risk Management flashcards for Personal Finance

21 of 50 cards from the Insurance and Risk Management deck — real questions with worked answers.

1. In personal finance, what is a "pure risk"?

   A pure risk is a situation that presents only the possibility of loss or no loss, with no chance of gain (e.g., illness, fire, death). Only pure risks are insurable, unlike speculative risks which also carry a chance of profit.

2. What is the difference between a peril and a hazard?

   A peril is the direct cause of a loss (e.g., fire, theft, illness). A hazard is a condition that increases the likelihood or severity of a loss (e.g., smoking, icy roads, faulty wiring).

3. Name the four main categories of personal financial risk a household should identify.

   1) Personal risks (death, illness, disability, unemployment), 2) Property risks (damage/loss of home, auto, belongings), 3) Liability risks (being held responsible for others' injuries or property damage), and 4) Income/inflation and market risks.

4. What are the four primary methods of risk management (risk-handling techniques)?

   Risk avoidance, risk reduction (control/loss prevention), risk retention (assumption), and risk transfer (chiefly through insurance).

5. Give an example of risk avoidance versus risk reduction.

   Risk avoidance eliminates the activity entirely (e.g., not owning a motorcycle to avoid crash risk). Risk reduction lowers frequency or severity while keeping the activity (e.g., wearing a helmet, installing smoke detectors).

6. When is risk retention the most appropriate strategy?

   Risk retention is best for losses that are small, predictable, and affordable (high-frequency/low-severity), or when insurance is unavailable or costs more than the expected loss. It is implemented through deductibles, self-insurance, and emergency funds.

7. What is the general rule for matching risks to strategies by frequency and severity?

   Low frequency/low severity: retain. High frequency/low severity: reduce and retain. Low frequency/high severity: transfer (insure). High frequency/high severity: avoid.

8. What is the fundamental principle that makes insurance work (risk pooling)?

   Insurance works by pooling many people's premiums so the predictable losses of the few are paid from the contributions of the many. It relies on the law of large numbers to make aggregate losses statistically predictable even though individual losses are not.

9. State the law of large numbers as it applies to insurance.

   As the number of similar, independent exposure units in a pool increases, the actual loss experience gets closer to the expected (predicted) loss. This lets insurers set premiums that reliably cover claims plus expenses.

10. Define "insurable interest" and when it must exist.

    Insurable interest means the policyholder would suffer a genuine financial loss if the insured event occurred. For property/liability it must exist at the time of loss; for life insurance it must exist at the time the policy is purchased.

11. What is the principle of indemnity in property and casualty insurance?

    Indemnity means the insured is restored to the same financial position as before the loss but no better; they cannot profit from a claim. Life insurance is an exception (it is a valued contract, not indemnity).

12. Define premium, deductible, and copayment.

    Premium is the amount paid (periodically) to keep coverage in force. Deductible is the amount the insured pays out-of-pocket before the insurer pays. Copayment is a fixed dollar amount the insured pays for a covered service.

13. What is coinsurance in a health insurance policy?

    Coinsurance is the percentage of covered costs the insured pays after meeting the deductible, with the insurer paying the rest (e.g., an 80/20 plan means the insurer pays 80% and the insured pays 20% until the out-of-pocket maximum is reached).

14. With an 80/20 coinsurance plan, a $500 deductible, and a $6,000 covered bill, how much does the insured pay (before the out-of-pocket max)?

    The insured pays the deductible plus 20% of the remainder: $$500 + 0.20\times(6000-500) = 500 + 1100 = \$1{,}600.$$

15. What does the out-of-pocket maximum do in a health plan?

    The out-of-pocket maximum caps the total the insured pays in a year (deductibles + copays + coinsurance). Once reached, the insurer pays 100% of covered, in-network essential benefits for the rest of the plan year. Premiums do not count toward it.

16. Compare an HMO and a PPO health plan.

    HMO (Health Maintenance Organization): lower cost, requires a primary care physician (PCP) and referrals, generally no out-of-network coverage. PPO (Preferred Provider Organization): higher cost, no referrals needed, and covers out-of-network care at a reduced rate.

17. What is an EPO health plan and how does it differ from an HMO and PPO?

    An EPO (Exclusive Provider Organization) covers only in-network care (like an HMO) but usually does not require a PCP or referrals (like a PPO). It offers no out-of-network coverage except emergencies.

18. What is a High-Deductible Health Plan (HDHP) and what account pairs with it?

    An HDHP has a high deductible and lower premiums; the insured pays most routine costs until the deductible is met. It qualifies the holder to open a Health Savings Account (HSA), which allows tax-advantaged saving for medical expenses.

19. List the three tax advantages of a Health Savings Account (HSA).

    1) Contributions are tax-deductible (pre-tax), 2) funds grow tax-free, and 3) withdrawals for qualified medical expenses are tax-free. This "triple tax advantage" is unique to HSAs, and unused balances roll over each year.

20. What is the key difference between an HSA and an FSA?

    An HSA is owned by the individual, requires an HDHP, and funds roll over indefinitely and are portable. An FSA (Flexible Spending Account) is employer-owned, does not require an HDHP, and is generally "use it or lose it" within the plan year.

21. What financial risk does disability insurance protect against?

    Disability income insurance replaces a portion of your earned income if you become unable to work due to illness or injury. It protects your ability to earn (your human capital), which is often a person's largest asset.

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