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DFP2 Insurance

Insurance concepts for Australian Diploma of Financial Planning

Underwriting is the process of... ...assessing risk, and making a decision whether or not to cover a risk
What is the confronting recommendation against over-insurance? That the person is not worth more dead than alive
The role of the life insurance underwriter is, in the first instance, to know what risk factors exist that can impact on the longevity and wellbeing of people in general, and then... to identify whether or not any of them exist in respect of a particular individual and if so, the extent to which they do
"Anti-selection" is where... ...the element of chance is being removed - by the applicant not disclosing material information
The split of human/online underwriting is currently: Roughly 50/50
Sophisticated methods to examine and identify trends in data include Predictive modelling and data mining
Field underwriting is the skill of... ...knowing what information to provide to the underwriter
A field underwriter might be the financial adviser, a paraplanner, an adviser support person and, in some instances, a staff member of the insurer, for example when tele-underwriting is used, or the underwriter themselves
The type of objective detail to be provided in regards to occupation might include: name of employer number of employees occupation title duties
Occupation risk factors and hazardous pursuits can be of particular importance when insurance applications focusing on [what?] are involved Disability
When considering the financial aspects of life insurance applications, the underwriter needs to ensure: • there is a logical basis for the amount of insurance • the applicant can afford the insurance.
Family history is relevant to all types of risk insurance, but particularly for... Family history for cancer and heart disease
Geographical risk factors are material to the assessment of all types of life insurance
two main moral risk factors intention to make a fraudulent claim not revealing all relevant information
the common law proprietary test, which requires an insurable interest, has been replaced with a test which focuses on economic loss
the duty of disclosure requires disclosure of information • the applicant and life insured believe relevant to the underwriter’s decision to accept or otherwise the application for insurance • that a reasonable person in the position of the applicant and the life to be insured would consider to be relevant.
When describing what information to provide, the phrase ‘as much as possible’ is often used. In fact, the opposite is the case. As little information as necessary should be provided
Insurers often provide specific questionnaires for health issues such as asthma, diabetes and epilepsy.
PMARs are reports requested from current or previous treating medical practitioners, usually in regards to specific medical issues that the underwriter feels would be of assistance to the assessment process.
The physical examination of the life to be insured is generally only required when the insurance benefit amount applied for is relatively high or the life insured is over a pre-set age.
If past earnings have materially fluctuated,. providing the reasons for this may also assist
It may be beneficial for the field underwriter to have access to the life to be insured’s accountant
One very important tool available to the underwriter is a report from the field underwriter
The underwriter may assess that the current level of risk is such that an application cannot be accepted; however, if the applicant was to reapply in the future the position may be more favourable
The minimum period of deferral can be as short as a few weeks with the maximum period generally being five years.
moral hazard in the context of income protection insurance can mean the insured person is motivated to continue claiming rather than being in gainful employment
income protection rates vary with age and increase at a greater rate than with term life insurance
females generally have much more frequent and longer lasting episodes of disability than males and consequently have higher premium rates for what kind of insurance? Income protection insurance
In life insurance, usually only a single set of standard rates is available and the underwriter may decide there is a need for an extra premium
Sometimes insurers have issued contracts with risk exclusions on them but these tend to be unsatisfactory - why? unsatisfactory, as one impairment can lead to another
many IP policies will have a deduction for statutory benefits such as workers or accident compensation schemes
While diabetes is not an insured event... its presence in the personal health history of the insured is extremely relevant.
a small sample of occupations that would be eligible for trauma cover but not TPD cover may include air traffic controllers, long-distance truck drivers, models, musicians and police
Due to the long-term horizon on life insurance policies the investments of life insurance companies are long term in nature
A registered life insurance company must hold capital in the ‘General Fund’ of the company and a minimum capital amount of $10 million
The purpose of underwriting is to achieve a spread of risk among a group, or pool, of lives
Two common areas of concern when exploring the client’s needs are • not gathering all the necessary information • making the process clinical and impersonal
In analysing the data that has been collected, the financial adviser is seeking to identify the client’s exposure to personal risk (i.e. illness, injury, disability or death), the likelihood that risk events may eventuate and the extent of any potential loss of income or assets which may result.
Personal risk management needs fall into three basic categories Asset preservtion Income preservation Future expenditure
Often the success of a financial plan is dependent on the client’s ability to continue to produce an income
The strategy selected will depend on the nature of the risk involved and the objectives of the risk management program, and may be a combination of several of the following strategies shown in Figure 3: • elimination of the risk • reduction of the risk • retention of the risk • transfer of the risk by way of contract.
disability insurance types – total and permanent disability (TPD) insurance – trauma insurance – income protection insurance – business expenses insurance.
Elements of the CIMER analysis Clean-up fund Income needs Mortgage Education needs Retirement savings needs
The more financial obligations the more life insurance is required
If income protection insurance is not taken out the TPD coverage will have to increase to replace the income component with a larger lump sum sufficient to cover the income shortfall for life
Where TPD is a rider benefit on a term life insurance policy the insurance company may not allow a TPD sum insured to be greater than the life insurance benefit
reducing benefit contract terminates with a payment, equal to the balance of the mortgage
increase the trauma cover to provide replacement income for clients who may not be eligible for income protection insurance
As products vary substantially between insurers, three of the most important determinants in making a product selection are: • the quality of the insurer • the premium • the wording of the policy
insurance companies may classify their applicants with reference to age, sex, profession, state of general health and smoking status
In relation to ownership of life policies, the Life Insurance Act 1995 (Cth) stipulates that a person who has reached the full age of 16 has the rights and powers of an adult
where a benefit is paid from a life insurance company to the trustees of a superannuation fund the superannuation fund cannot pay the benefit to the member or beneficiary until a superannuation condition of release has been satisfied
In business insurance cases, as discussed in Topic 2, the ownership of the policy is determined by a number of factors such as the purpose of the policy, who ultimately benefits from the policy and the tax considerations of the policy
The Murray and Trowbridge reports that led to Life Insurance Framework legislation (see Topic 3), were critical of upselling strategies that increase insurance commissions at the expense of the member’s retirement objectives.
superannuation strategies should meet the client’s specified needs and objectives in consideration of the following issues and competing interests that may include age and health of the key family members trend of the household’s need for cover householder’s financial literacy and budgetary discipline
if the need is long term and increasing, then there may be cause for some level premium cover
it is best to start with a sound understanding of the client’s current arrangements. If the client has an existing financial plan it may be worthwhile to review their Statement(s) of Advice (SOA’s), to ensure that what is recommended improves their position
The most common premium recommendation errors occur when consideration is only given to the first year’s premium
The taxation of benefit payments from superannuation can vary depending on whether the beneficiary is a tax dependant or non-tax dependant at the time of the member’s death
the tax status of beneficiaries... should be monitored
In the instance where a family trust ownership is ignored and an income protection policy is issued in the insured’s name, the entire proceeds would be assessable in the hands of the insured.
required levels of insurance cover may need to be increased if the client has taken on more debt, is earning more income or if the family structure has changed
Created by: frankhall
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