CFP Module 3 flashcards

36 cards. Read the term and the definition here. The deck at the top of this page is optional.

Pure risk

A situation with only the possibility of loss or no loss, never gain. It is the type of risk insurance is designed to transfer, unlike speculative risk.

Law of large numbers

As the number of independent, homogeneous exposure units increases, actual loss experience converges toward expected loss, making premiums more predictable for the insurer.

Adverse selection

The tendency of higher-risk individuals to seek or retain insurance more than lower-risk individuals, which can raise costs unless controlled by underwriting and exclusions.

Indemnity principle

Insurance restores the insured to approximately the pre-loss financial position without profit. It underlies actual cash value settlement, subrogation, and insurable interest requirements.

Human life value

The present value of an individual's expected future earnings after subtracting self-maintenance costs and taxes, used to estimate the amount of life insurance needed.

Universal life Option B

An increasing death benefit equal to a level specified amount plus the accumulated cash value, so the total death benefit grows as the account value grows.

Nonforfeiture options

Choices available when a cash value life policy lapses: cash surrender, reduced paid-up insurance, or extended term insurance for the existing face amount.

Incontestability clause

A provision stating the insurer cannot contest the policy for material misrepresentation after it has been in force for a specified period, commonly two years.

Modified endowment contract

A life policy that fails the seven-pay test. Loans and withdrawals are taxed income first, and a 10% penalty may apply before age 59½.

Coinsurance

The percentage of covered expenses the insured pays after the deductible, with the insurer paying the remainder until the out-of-pocket maximum is reached.

COBRA continuation

A federal right to continue group health coverage after a qualifying event, generally 18 months, extended to 29 months for disability, at up to 102% of premium.

Health savings account

A tax-advantaged account available only with a qualifying high-deductible health plan; contributions are pre-tax, growth is tax-free, and unused funds roll over.

Birthday rule

A coordination-of-benefits rule for dependent children covered by both parents: the plan of the parent whose birthday falls earlier in the calendar year pays first.

ADL benefit trigger

Long-term care benefits begin when the insured cannot perform at least two of six activities of daily living for 90 days or has severe cognitive impairment.

Elimination period

The number of days of covered service the insured must pay for before long-term care or disability benefits begin; a longer period reduces premium.

Inflation protection rider

An optional long-term care feature that increases the daily or monthly benefit over time, often 3% or 5% compounded, to keep pace with rising care costs.

Partnership program

A state long-term care arrangement in which buying a qualifying policy provides Medicaid asset protection equal to the benefits paid if coverage is exhausted.

Own-occupation definition

A disability policy definition that pays benefits when the insured cannot perform the duties of their own occupation, even if working in another field.

Residual disability

A partial disability benefit that pays a proportion of the full benefit based on the percentage of income lost while the insured continues working.

Presumptive disability

A provision paying the full benefit without an elimination period for specified catastrophic losses such as loss of sight, speech, hearing, or two limbs.

Social Security offset

A group long-term disability provision that reduces the insurer's payment by the amount of Social Security disability benefits the employee receives.

HO-3 special form

A homeowners policy covering the dwelling and other structures on an open-perils basis while personal property is covered for named perils only.

Coinsurance formula

Recovery equals loss times the carried limit divided by the required limit, which is the coinsurance percentage times the property's value at loss.

Business income coverage

Property coverage that replaces lost net income and continuing normal expenses during the period needed to repair or replace damaged property.

Negligence elements

A liability claim requires duty owed, breach of that duty, proximate cause linking breach to harm, and actual damages suffered by the claimant.

Personal umbrella policy

Excess liability coverage above scheduled homeowners and auto limits; it may drop down when underlying coverage is exhausted and can broaden coverage.

Claims-made liability form

Liability coverage responding to claims first made during the policy period, subject to a retroactive date, rather than to when the act occurred.

Self-insured retention

The amount the insured pays before an umbrella or excess policy responds to a loss not covered by scheduled underlying insurance.

Section 125 cafeteria plan

An employer plan permitting employees to pay for certain benefits with pre-tax salary reductions, with mid-year changes allowed only for qualifying life events.

$50,000 group term rule

Employer-paid group term life coverage above $50,000 creates imputed taxable income to the employee, calculated using IRS Table I rates.

Medicare Part A

Hospital insurance covering inpatient stays, skilled nursing facility care after a qualifying stay, hospice, and some home health, generally premium-free with 40 work quarters.

Full retirement age

The age at which unreduced Social Security retirement benefits begin: 67 for people born in 1960 or later; claiming at 62 permanently reduces benefits.

Medicaid look-back period

A five-year review of asset transfers before a Medicaid long-term care application; uncompensated transfers can cause a period of ineligibility.

Key person insurance

Life or disability coverage owned by a business on a critical employee, with proceeds indemnifying the business for lost revenue or replacement costs.

Buy-sell agreement

A contract setting how a business interest is valued and purchased on a triggering event such as death, disability, or retirement, often funded with insurance.

Experience modification factor

A workers compensation rating factor comparing an employer's past loss experience to the industry average; a factor below 1.00 reduces premium.