Understanding Life Insurance and Liability Insurance: Types, Contracts, and Risks - Prof. , Study notes of Introduction to Business Management

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Exam 3 Notes Section 12: Loss of Life  Managing Personal Risks  Financial impact of: premature death, loss of health, disability, unemployment, retirement  Taking perspective of survivors, those dependent ton you (premature death—only exists for dependents)  Life insurance is basically for people with a family  Premature death  Funeral costs; loss of income stream for dependents  Mortality table—male life expectancy is lower  Men pay higher premiums for life insurance; women pay more for annuities/pension premiums since they live longer  Approaches to the amount of life insurance one should own  Human life approach:  Calculate present value with current salary  Needs approach:  Look at how much dependents need to retain their lifestyle; how much they spend  Insurance provides gap between what they spend and other sources of income  Dependency period is how long dependents are dependent on you; don’t need the insurance once second income can pay for all needs (out of school, grow up)  Adv: more accurately reflects situation of dependents  Disadv: lengthy process based on a lot of assumptions  Premature death: 3 legged stool  Diversify; don’t put all your eggs in one basket  Gov’t  Kids get pension until they turn 18  Once spouse reaches retirement age, then pension kicks in  Employer  Provide basic pension usually  Usually provide access to group life insurance  Individual/family  Save money or purchase standard life insurance  Having 2 income streams also helps to diversify  Parties to the life insurance contract  Insurable interest: need to suffer a financial loss if person passes away  Face amount of insurance is paid out if person passes away  Beneficiary: can name anyone and can change whenever you want  Irrevocable beneficiaries: can only be changed with written consent of beneficiary  Secondary/contingent beneficiary: money goes to them if primary beneficiary dies  Term insurance (two types of insurance are term and whole)  For specific term and after that it expires, but it is renewable  Max is up to retirement  Pure risk contract  Temporary protection  Renewable: at end of amount of time (term), can renew  Value: insurance company can’t turn you down—if you get sick, premium still only goes up with population average rather than your individual average  Convertible: can convert to whole life policy if you want life insurance beyond retirement (age 65/70)  Limitations: it ends at some point  Adv: cheaper (premium is much lower), best for people with dependents  Whole life insurance  Permanent insurance, fixed premium  Cash value of policy: will get savings part back if you cancel policy  Flexible product: only good product if you stick with it until the end  Two types of policies  Ordinary whole life  Limited payment life insurance: limited pay life; single-premium life  Variable life insurance  Similarities to whole life: permanent insurance, fixed premium  Differences to whole life: investment options, face values uncertain, cash values uncertain  Universal life insurance  Offers more flexible premium payment options than do most other forms of life insurance  The minimum initial premium require to activate the policy is specified by the insurer but the policy owner usually decides the timing and size of subsequent premiums  Policy owners can periodically adjust the size of the death benefit in most universal life contracts, although insurers may require proof of insurability if a request is made to increase the death benefit  Type A universal life  Not common; payout is exactly the face amount, no matter what  Death benefit is the cash value plus whatever amount is necessary to bring the total to the specified amount  Type B  Really only see this type; paying more  Has fluctuating death benefits that are made up of a specified amount of death protection plus the policy’s cash value  As the cash value grows over time, so does the death benefit Criminal and Civil Law  Criminal Law  Directed toward wrongs against society  Examples include murder, robbery, rape, assault with a deadly weapon  Civil Law  Directed toward wrongs against individuals and organizations  include institutions and corporations  Examples include breach of contract and negligent acts Torts  “Everything else”  Legal injury or wrong to another that arises that of actions other than breach of contract  Courts will provide a remedy by allowing recovery in an action for damages  Legal injury  Results when a person’s rights are wrongfully invaded  Right of personal privacy, right to enjoy one’s property and right to be free from personal injury Basic Law of Negligence--The Negligent Act  Negligence is the failure to exercise the degree of care required by law; fail to provide the required level of care  Conduct that a reasonably prudent individual would exercise to prevent harm  A negative act  Failure to do something (not signaling when turning)  Negligence maybe the failure to act when there is a duty to act  A positive act  The doing of something  Example: You hit the car in front of you when car stops Negligent Act  A voluntary act  One that is done voluntarily  An involuntary act is excusable  A negligent act is not excused because there is no intention to harm  An imputed act  One is liable not only for one’s own actions but also for the negligent acts of service or agents acting in the curse of their employment or agency  Employers may be sued because of negligence acts of their employees  Vicarious liability  Example: Janitor mops the floor and someone slips. The company is liable, not the janitor  The company is always liable for the individual acts of their employees, which is why you should fire someone if they are negligent  Proximate cause of the loss  There must be an unbroken chain of events leading from the negligent act to the damage sustained Defenses against Negligent Claims  Contributory Negligence  If both parties are to blame in a given accident  May not collect against the other, even if the defendant was 90 percent to blame and the plaintive only 10 percent to blame  1st defense is saying the other person is at fault too; if defendant is even a little bit guilty, they get NO money from plaintiff  “The other person also made a mistake, so I should not be completely liable”  Example: You didn’t turn on but I did not stop at the stop sign  Assumed Risk  Defendant may raise the defense that the plaintiff has no cause for action because the plaintiff assumed the risk of harm from  The conduct of the defendant  The condition of the premises  The defendant’s product  Example: Going to a baseball game, you cannot sue when you get hit by a baseball because you assume the residual risk when you attend a game  Guest-Host Status  Relate to the standard of care by an automobile driver to a passenger  Laws that restrict passengers to sue drivers—assume risk by deciding to ride with person  Can only hold drivers liable if they act gross negligently EXAMPLE: negligence Loss: $30,000, car B has the loss A is at fault 90% B is at fault 10% - Contributory negligence law: how much does B get from A? $0 - Comparative negligence law: B collects $27,000 from A (90%) - Last Clear Chance rule: A had last clear chance to avoid accident completely, so it doesn’t matter if B was at fault—B collects $30,000 Factors Leading to Higher Standards of Care  Expanding application of liability  Courts tend increasingly to impose liability in a new factual setting  Weakening of defense against a liability  Most states have enacted a statute that replaces the defense of contributory negligence with comparative negligence  The liability of the defendant is reduced by the extent to which the plaintiff was contributively negligent  Last clear chance rule  A plaintive who was contributively negligent may still have a cause of action against the defendant  If it can be shown that the defendant had a last clear chance before the accident to avoid injuring the plaintiff but failed to do so  Trend to increase liability risk expense for corporations  Courts expect increases in the standard of care today  Res Ispa Loquitur  “The thing speaks for itself”  Plaintiff may sometimes collect without actually proving negligence on the part of the defendant 1. The defendant is in a position to know the cause of the accident; the plaintiff doesn’t understand the details 2. The defendant had exclusive control of the instrumentality that caused the accident 3. The use of the instrumentality would not normally cause injuries without the existence of negligence  This is applied in medical malpractice suits, when the plane crashes  There is an increase in the number of medical malpractice lawsuits because there is an increased likelihood of winning a case. This increases the liability of practitioner, which increases the cost of medical services  Tradeoff: Do you want to keep costs down or protect everybody?  Expansion of imputed liability  Joint and several liability  When an accident occurs and several different parties are negligent  The plaintiff may sue and collect from one or more of the negligent parties  as soon as multiple companies are at fault, you can pick who you want to sue—usually big company gets sued first (but all are jointly liable)  Example: 2 companies build a building, they split the work. There is a major accident and bystanders are injured, who is liable?  Whenever multiple companies are at fault to some degree, you can choose who you want to sue. Big companies always get sued first  Increased liability expense for big companies  Superfund legislation  Created by the Federal government to help fund the cleanup cost of major pollution sites (EPA)  Estimated that more than 80 percent of the funds spent on the Superfund enforcement is for overhead (legal fees, etc.) and less than 20 percent for cleaning up the environment  Whoever owns the property now is responsible  There are questions of effectiveness of this system  Larger corporations have to be very careful when they are choosing business partners  Example: Sears was talking to new small company about being the point of sale for an energy efficient car. This company had no liability record, so Sears cut the project because the liability exposure was too big Factors Leading to Higher Standards of Care  Changing concepts of damage  More liberal interpretation of what types of damages may be allowed in negligence actions  Damages have been awarded for such things as mental anguish  Every state allows punitive damages except Massachusetts, Nebraska and Washington  Awards used to punish defendants because their actions constituted gross negligence or willful and wanton misconduct  Increased damage awards  The effect of inflation in reducing the purchasing power of the dollar has undoubtedly contributed to the increased amounts of damage awards  Perhaps the existence of liability insurance has caused juries to be more generous  Than they would be if they knew the plaintiff would pay the damages personally  The insurance industry is supporting various types of tort reform, including  Imposing restrictions on the right to sue  Abolishing punitive damages in civil suits  Reducing the standard of care to the standard existing all the time the product was made instead of at a time the loss occurred  Placing a ceiling on non-economic damages  Repealing the collateral source Liability Claims  Liability exposures are important for corporations, much more dynamic than property risks a lot pricier  We add warning labels to try to protect from certain exposures 2. Glass breakage a. Separate claim if not from collision accident; insurance company lets you pick whether it’s collision or non-collision claim **deductible usually higher for collision claims than non-collision claims  Exclusions: normal wear and tear; only the car and everything permanently attached to car is included when broken into/things stolen  Transportation and towing—pay some for towing  Other provisions: actual cash value vs total replacement cost vs total  Actual cash value: what you get—needs to be similar to your car  Replacement cost: same quality car brand new today  Other parts of policy  Part E: duties after an accident/loss  Promptly notify insurer how, when, and where—they don’t have to pay if you wait too long  Cooperate with insurer in process  UM claim: promptly notify police  Part F: general provisions  Territorial limits—US and Canada  Policy cancellation—can cancel anytime: ins co will repay you for what you’ve paid in advance  Ins co can only cancel if you don’t pay or if your license gets suspended (usually 6 month contract)  Endorsements  Underinsured motorists: has insurance but claim is much higher than their limit (pay difference)  Motorcycles, snowmobiles  “gap” insurance: difference between what the car is worth and what you owe on the car—comes into play if car is stolen or totaled  Cost of auto ins  Primary factors  Territory—where you live/drive: big rating factor  Age, gender, marital status, use of auto—cannot use race  Men on avg have higher accident rates  Married people have lower accident average  Pay higher rate using car for business vs driving downtown vs for farming  Secondary factors  Vehicle type, driving record, number of vehicles insured  Can move up or down depending on how many accidents you have; more/less discounts, bad/good risk Section 11: Risk management for auto owners II  No Fault  No person would be held liable for an accident; the tort system would be eliminated  Each person’s auto insurance would pay for damage to his or her car and for injuries to the insured and his or her family while riding in car  No litigation would be necessary about fault because the insurance policy would pay without regard to fault  Everyone gets coverage based on personal preferences  Incentives to drive carefully because your rate can still be affected if it’s not your fault  Not opportunity would exist to sue and collect for noneconomic losses such as pain and suffering (not measurable/quantitative, so can’t insure it)  Modified no fault  No pure fault plants are in operation in the US because many Americans don’t want to vie up their right to bring a tort action  Can’t sue unless your medical bills exceed a certain threshold; still can’t collect for pain and suffering if under limit amount  Add-on states  Injured parties can collect from their own insurers  However, no restrictions are placed on the ability to sue—can sue other party and collect from ins co first; for every ins policy in that particular state  The first-party benefits are purely an add-on with nothing being taken away in exchange  Additional rights and benefits, premiums to up (rates go up)  Choice no fault  3 states have this system: Kentucky, NJ, and Penn  People can choose to pay lower premiums to purchase no fault coverage the restricts the right to sue  Can purchase no-fault, give up right to sue, collect from ins co—premium discount  OR they can pay higher premiums to retain their ability to sue  Std policy, can sue, collect from negligent driver Section 13: health and loss of income risks  Financial impact of disability  Lost income due to tie away from work  Length of disability  Temporary disability vs permanent disability  Total disability (can’t work at all) vs partial disability (can work a few hours a week)  Health exposures: 3 legged stool  Employer  Health insurance  Disability insurance (offered but you pay full amount)  Gov’t  Health and disability ins (medicare; Medicaid for low-income people)  Indiv/family  Health and disability insurance  Health insurance plans  Fee for service plans: standard set up—get sick, go to hospital, bill, ins co pays  Managed care: cutting out unnecessary fees; bulk discounts; focus on prevention  HMO (health maintenance org): need to name primary physician for whenever you have an issue; go to that physician first to tell you what to do, go to hospital if they can’t help you; cuts unnecessary care/duplicate exams  PPO (preferred provider organizations): like POS without primary care physician requirement; more relaxed than POS or HMO  POS (point of service plans): open-ended HMO; can be organized in all the same ways as an HMO; have more freedom of choice in selecting doctors and other medical care providers  PSO: same as HMO, run by medical providers (hospital)  Disability insurance  Long term: pay up to retirement age  Short term  Occupational: worker’s comp; if something happens on the job, you are covered  Non-occupational disability: if you are not on the job, this pays; helps avoid double collecting  Waiting periods  Benefits do not happen on the first day  With long term contracts, you may have to wait up to a year  This avoids minor claims and cuts down on cost  Similar to a deductible  Provides incentives for people to go back to work  Can purchase up to 80% of your income because you do not want people gaining from disability  Financial impact of unemployment and retirement  Unemployment  What happens to income?  Moral hazard problems  Insurance cos do not like to provide unemployment insurance because:  Cannot pool the risk  Someone losing their job may be because they are a bad worker  Not a random event  Systematic risk is too high  A lot of companies may fire many people at one time  Retirement