HS 311 Fundamentals of Insurance Planning
Risk management framework
Distinguish pure risk (loss or no loss) from speculative risk. The five techniques are avoidance, reduction, transfer, retention, and sharing. Insurable risks are accidental, measurable, large enough to matter, spread across many similar exposure units, and not subject to simultaneous catastrophic loss.
Policy mechanics
Core concepts include insurable interest, indemnity, subrogation, deductibles, policy limits, actual cash value versus replacement cost, and coinsurance. Coinsurance is a penalty clause, not a benefit: it forces insureds to carry a stated percentage of value or share the loss.
Life, health, disability, and long-term care
Compare human life value with the needs (capital retention) approach for life insurance. Know term, whole life, universal life, and variable life mechanics - premiums, cash value, and who bears investment risk. For disability, focus on own-occupation versus any-occupation definitions, elimination periods, and residual benefits. Long-term care policies typically trigger on inability to perform two of six activities of daily living or on cognitive impairment.
Traps
- Applying the coinsurance penalty even when the insured carried enough coverage, or forgetting the deductible.
- Confusing HO-3 (open perils on the dwelling, named perils on contents) with HO-5 (open perils on both).
- Treating cash value as protection rather than as a savings element with surrender charges.
- Ignoring exclusions and sublimits when computing a claim payment.
Worked example
Replacement cost is $500,000, the policy has an 80% coinsurance clause, the owner carries $300,000, the loss is $100,000, and the deductible is $1,000. Required insurance = $400,000. Payment = ($300,000 / $400,000) × $100,000 − $1,000 = $74,000.