CFP Module 3 key terms

A situation offering only the chance of loss or no loss, with no possibility of gain. Insurers generally insure pure risks, while speculative risks involving possible profit are usually uninsurable.

A situation that can produce either gain or loss, such as investing in a stock or starting a business. Because both outcomes are possible, private insurers typically exclude it from coverage.

A financial stake in the continued existence of a person or property such that a loss would cause genuine economic harm. It must exist at policy issue for life insurance and at the time of loss for property coverage.

The statistical principle that as the number of similar independent exposure units increases, actual losses converge toward expected losses. It underlies the insurer's ability to predict aggregate claims and set stable premiums.

The tendency of people with higher-than-average risk to seek or retain insurance more eagerly than low-risk individuals. Insurers counter it through underwriting, exclusions, waiting periods, and risk-based pricing.

The increased likelihood of loss caused by the insured's own careless or dishonest behavior once insurance is in place. Deductibles, coinsurance, and claims investigation are common controls.

Knowingly accepting the financial consequences of a loss rather than transferring or avoiding the exposure. It may be deliberate, as with a deductible, or unconscious when a risk is simply overlooked.

A condition that increases the frequency or severity of a loss, such as icy stairs, poor wiring, or a reckless driving record. Hazards are physical, moral, or morale in nature.

The actual cause of a loss, such as fire, windstorm, theft, or collision. Policies list covered perils and exclude others, so distinguishing peril from hazard matters in claims analysis.

A property or liability policy that covers only the causes of loss specifically listed in the contract. Anything not named is excluded, which makes the coverage narrower than an open-peril form.

A policy covering all direct physical loss except causes that are specifically excluded. The burden shifts to the insurer to show an exclusion applies, giving broader protection than named-peril forms.

A property insurance provision requiring the insured to carry limits equal to a stated percentage of replacement cost, or claims are reduced proportionally. It penalizes underinsurance and rewards carrying adequate limits.

A settlement method equal to replacement cost minus depreciation, reflecting the property's value at the time of loss. It pays less than replacement cost coverage and is common in older or lower-tier policies.

A settlement basis paying what it costs to repair or rebuild with new materials of like kind and quality, without deducting depreciation. It may be capped by policy limits and requires adequate insurance to value.

The amount of a covered loss the insured pays before the insurer responds. It reduces small claims, lowers premiums, and discourages moral hazard by keeping the insured financially at risk.

Coverage for a specified period with no cash value; it pays a death benefit only if the insured dies during the term. It provides the most death protection per premium dollar.

Permanent coverage with level premiums, a guaranteed death benefit, and a cash value that grows over time. Policy loans and partial surrenders can access the cash value.

Permanent coverage with flexible premiums and an adjustable death benefit, where the cash value earns interest and policy charges are deducted monthly. Insufficient funding can cause the policy to lapse.

A borrowing against a cash-value life policy's accumulated value, secured by the policy and generally not taxable. Unrepaid loans with interest reduce the death benefit and may lapse the policy.

A person named to receive policy proceeds even though they are not the insured or policyowner. A valid designation prevents proceeds from passing through probate and overrides a will.

A beneficiary distribution method dividing a deceased beneficiary's share among that beneficiary's descendants. It contrasts with per capita, which divides equally among surviving named beneficiaries.

A rider that pays the policy's premiums if the insured becomes totally disabled for a specified period, keeping coverage in force. It protects the policy from lapsing during a disability.

A provision allowing the insured to take part of the death benefit early when diagnosed with a terminal or qualifying illness. The remaining benefit is reduced, and tax treatment varies.

The sale of an existing life policy by a terminally or chronically ill insured to a third party for less than the face amount. Proceeds are generally tax-free when the seller meets qualifying conditions.

Rules determining which of two or more health plans pays first when a person is covered by both. The primary plan pays its full benefit and the secondary plan pays the remainder up to its limit.

A tax-advantaged account available to people enrolled in a qualifying high-deductible health plan. Contributions are deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free.

An employer-sponsored account funded with pre-tax salary deferrals to reimburse qualified medical or dependent care expenses. Use-it-or-lose-it rules apply, subject to limited carryover or grace-period options.

An employer benefit arrangement under which employees choose among cash and qualified benefits with pre-tax dollars. It must satisfy nondiscrimination rules and is often paired with FSAs and premium conversion.

Basic self-care tasks such as bathing, dressing, eating, toileting, transferring, and continence. Inability to perform a set number of ADLs is the standard trigger for long-term care benefits.

A benefit trigger based on a diagnosed deterioration or loss of intellectual capacity, such as dementia, requiring substantial supervision. It allows benefits even when the insured can physically perform ADLs.

The waiting period before long-term care or disability benefits begin, similar to a deductible measured in days. Shorter periods raise premium; longer periods lower it.

The maximum length of time long-term care benefits are payable, such as two, three, or five years, or a lifetime. It may also be expressed as a total dollar pool.

A disability standard that pays benefits when the insured cannot perform the material duties of their own specific occupation. It is the most favorable definition for claimants but the most expensive.

A disability standard that pays only if the insured cannot perform the duties of any occupation for which they are reasonably suited by education, training, or experience. It is stricter and cheaper than own-occupation.

A partial disability benefit paying a proportional amount when the insured returns to work but earns less than before the disability. It encourages rehabilitation and gradual return to employment.

A condition meeting the policy's stated standard, whether inability to perform one's own occupation or any occupation. The definition chosen drives both claim eligibility and premium cost.

Excess liability coverage sitting above auto and homeowners limits, plus broader coverage for some exposures those policies exclude. It typically requires underlying policies to maintain specified minimum limits.

Failure to exercise the degree of care a reasonable person would under similar circumstances, resulting in harm. A successful claim requires duty, breach, causation, and actual damages.

A liability limit applying one total dollar amount to all bodily injury and property damage from a single accident, regardless of how many people are injured. It offers more flexibility than split limits.

The process of evaluating an employee group as a whole rather than each individual, relying on group size, industry, and participation levels. It avoids individual evidence of insurability and lowers administrative cost.

A federal law requiring certain employers to offer continued group health coverage to qualified beneficiaries after a qualifying event such as termination or divorce, with the individual paying the full premium.

Rules establishing when Medicare pays after another insurer, such as an employer group plan for a working beneficiary. It prevents Medicare from paying first when primary coverage exists.

Optional Medicare coverage for physician services, outpatient care, preventive services, and durable medical equipment. It requires a monthly premium and is subject to deductibles and coinsurance.

A joint federal-state program providing health coverage to low-income individuals and long-term care for those who qualify. It is means-tested, unlike Medicare, which is based on age or disability.

Property insurance that replaces lost net income and continuing normal expenses when a covered peril interrupts operations. It typically applies during a period of restoration after physical damage.

Life or disability coverage purchased by a business on an essential employee whose loss would harm earnings. The business owns the policy, pays premiums, and receives the proceeds.

A contract among business owners specifying how a departing owner's interest will be purchased, often funded by life or disability insurance. It provides continuity and a fair purchase price.