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RMI 270 Final Exam

by: Danielle Notetaker

RMI 270 Final Exam RMI 270

Danielle Notetaker
GPA 3.8

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About this Document

This is a list and some description of all the things from Ch.11-18 that will be on the final exam
Dr. Fitzgerald
Study Guide
Risk, Management, retirement, social, Securuity, medical, Expense, annuities, life, Insurance, cobra, IRA, Grace, period, Disability, 403(b), 401(k), vesting
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This 9 page Study Guide was uploaded by Danielle Notetaker on Monday May 2, 2016. The Study Guide belongs to RMI 270 at Ball State University taught by Dr. Fitzgerald in Spring 2016. Since its upload, it has received 20 views. For similar materials see in Risk Management And Insurance at Ball State University.

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Date Created: 05/02/16
Class  Lecture  Notes  for  RMI  270  Final  Exam     Ch.6  Operations     • Ratemaking-­‐  the  pricing  of  insurance  and  calculations  in  premiums   • Underwriting-­‐  process  of  selecting,  classifying,  and  pricing  applicants  for   insurance   o Underwriting  Principles:   § Attain  profit   § Select  insureds  according  to  standards   § Provide  equity   • When  making  decisions  you  can::   o Accept  it   o Accept  it  with  changes   o Reject  it   • Production  =  Sales   • Producers  =  Agents     Different  Types:   • Agent  –  represents  the  company,  they  have  a  contract  with  the  company   • Broker  –  represents  the  insured,  NOT  restricted  to  one  company   • Solicitor  –  hired  by  agent  to  solicit  for  them,  go  door  to  door  to  sell  future   business   • Consultant  –  independent,  does  not  work  for  a  company     Investments:   • General  account  –  all  investments  for  all  insureds   • Separate  account  –  variable     Ch.11  Life  Insurance   • Death  –  is  a  certainty   • Premature  death  –  if  you  die  prior  to  your  life  expectancy     Why  you  need  life  insurance   • Paying  for  final  expenses  such  as….   o Nursing  home   o Funeral/burial   o Personal  bills   o Paying  mortgage  debt   o Legal  fees     How  much  life  insurance  do  you  need?   • Multiple  of  earnings  method:  multiple  annual  earnings  by  an  arbitrary   number   • Capital  Retention:  determine  how  much  capital/money  you  need,  you   RETAIN  the  capital  investment  and  NEVER  spend  it,  you  just  live  off  the   earnings  from  returns     Term  Insurance   • Straight  term  –  coverage  remains  the  same  while  premiums  increase   • Decreasing  term-­‐  premiums  remain  the  same  while  coverage  decreases   • Renewability  –  renew  policy  without  evidence  of  insurability   • Convertibility  –  covert  to  whole  life  policy  without  evidence  of  insurability   • If  you  want  maximum  coverage  and  the  maximum  amount  of  protection,  you   should  buy  term  life  insurance     • Term  insurance:  least  expensive  policy,  but  gives  you  the  most  protection  per   dollar   o Only  pays  if  death  during  the  term   o No  savings  component  (not  used  for  retirement  savings)   Disadvantages:   • Does  NOT  build  cash  value   • Premiums  increase  as  you  get  older   • Low  interest  rates  raise  premium  prices     Whole  Life  Insurance   • More  expensive,  but  it  has  cash  value   • Has  limited  payment  (only  pay  for  a  fixed  number  of  years)   • Promises  to  pay  the  face  amount  of  the  policy  at  death  or  age  100   • Permanent  protection   • Non-­‐forfeiture  protection   o Options  include:  guaranteed  cash  value,  reduced  paid  up  insurance,   extended  term   • Reasonable  cost   • Flexibility     4/27  NOTES     Retirement  Planning:   • Set  your  goals   o At  what  age  do  you  want  to  retire?   o How  much  money  will  you  need?   • Estimating  future  retirement  needs/income  is  difficult   • Mistakes  in  Retirement  planning   o Start  saving  too  late   o Save  too  little  money   o Invest  your  money  too  conservatively  (need  to  take  more  risks)   o People  only  plan  to  save  for  only  10-­‐15  years  after  retirement,  but  in   reality  people  live  longer   o People  believe  that  living  expenses  will  be  lower  when  they  retire,   which  is  NOT  true   o Never  take  money  out  of  your  retirement  savings  plan   • Reasons  people  do  not  save:   o Too  young   o Ill  start  saving  next  year   o Spend  bonus   o My  pension  will  work   o My  kids  will  take  care  of  me   o Too  old   o Expensive  car     Pension  Plans   o Defined  Contribution:  company  guarantees  contribution,  but  not  a   return  on  it  or  a  retirement  benefit   Advantages:   • Tax-­‐deferred   • Funded  through  payroll  deduction   • Employer  usually  matches  what  the  employee  contributes   o Defined  Benefit:  company  guarantees  benefit  but  not  contribution   %  of  benefit  x  avg.  salary  x  yrs  of  service   • Guaranteed  income   • No  investment  risk   • Not  dependent  on  your  ability  to  save   • Tax  deferred   o Cash  Balance  Plan  –  bad  for  defined  benefit  plans   o Money  Purchase  Plan  –  bad  for  defined  contribution  plan     Retirement  Products  Available:   o Annuities   o Qualified  plans  –  the  IRS  has  approved  it   o Non-­‐qualified  plan   o Defined  contribution   o Defined  benefit     • Profit-­‐  Sharing  Plan:  based  on  the  company’s  profits,  so  if  the  company  is  not   making  a  profit,  then  you  will  not  have  anything  going  into  your  retirement   savings  plan.  If  you  leave  your  job  (terminate),  you  will  not  get  to  take  this   money  with  you     Tax  Advantages  for  Qualified  Plans   • Tax  deduction  to  the  employer  for  employer  contributions   • Employee  contributions  are  taxed  free  also       Vested  –  you  take  the  money  from  your  retirement  savings  account  even  if  your  job   is  terminated  or  you  leave  your  job   • Vesting  Schedules:  as  year  of  service  increase,  you  will  get  a  higher   percentage  of  your  money  that  you  can  take  with  you   • Cliff  Vesting-­‐  you  can  only  take  all  of  your  money  after  a  certain  number  of   years   o Ex:  In  year  5,  you  can  take  100%  of  your  benefits     401(k)  Plan  –  refers  to  the  section  401(k)  in  the  tax  revenue  code   • Money  is  tax  free  until  the  money  is  withdrawn     Factors  that  influence  retirement  planning:   • Longevity   • Inflation   • Health   • Pensions   o Defined  benefit   o Defined  contribution   • IRA   o Traditional  IRA   o Non-­‐deductible  IRA   o Roth  IRA-­‐  no  age  70  ½  you  can  contribute  for  as  long  you  want,  pay   taxes  now   o Maximum  limit  =  $5,500  tax  free,  income  tax  deductible   o 59  ½  -­‐  you  cannot  take  the  money  out  of  your  IRA  before  this  age,  if   you  do  you  will  pay  a  10%  penalty  tax   o 70  ½   o minimum  required  distribution     o money  accumulates  tax  free   o distributions  are  taxable   o cannot  invest  in  life  insurance                               Things  to  know  for  Final  Exam  Ch.  11,  12,  14,  15,  16,  17,  &  18   • Medical-­‐   o Surgical  expense,  what  does  it  cover?   § Surgical  expense  pays  the  cost  of  surgery  in  or  out  of  the   hospital   § NOT  all  procedures  are  covered,  cosmetics  NOT  covered   o Major  medical  policy:   § High  maximum  -­‐  $1,000,000  limit  or  more   § Coinsurance  –  usually  80/20   § High  deductible   § Stop  loss  limit   o Stop  loss  limit-­‐  when  you  reach  that  number,  copayments  stop,  100%   is  covered/pay  for   § Deductible  counts  toward  reaching  the  stop  loss  limit     • Renewable  features  of  contract   o Conditionally  renewable   o Guaranteed  renewable  –  the  company  guarantees  renewable,  but   keep  the  right  to  increase  premium   • Pre  existing  conditions   • Annuities   o Life  annuity  with  no  refund-­‐  largest  income   o Pure  life  annuity  –  MAXIMUM  amount  of  income   o Refund  annuity  –  cash  or  installment,  beneficiary  will  collect  the   refund  if  you  die  early     o Annuity  certain  –  no  income  for  life,  gives  annuity  for  certain  #  of   years,  NOT  suggested  to  buy   o What  is  the  risk  of  annuities  for  insurance  companies?   • Medical  expense  coverage  –  what  is  provided   o Hospitalization  –  pays  a  portion  of  per-­‐day  room  &  board  charges   o Surgical  expenses  -­‐  pays  the  cost  of  surgery  in  or  out  of  the  hospital   o Physician  expenses  –  pays  for  non-­‐surgical  hospital  care,  includes   consultation  with  specialists  and  lab  tests   o Dental  services  –  covers  necessary  dental  care  &  some  dental  injuries,   mostly  offered  through  group  insurance   • Gatekeeper  –  managed  care,  HMOs   • HIPAA   o Key  word  is  Portability-­‐  know  what  this  means   • Coordination  of  benefits  –     o Jim  &  Pat  each  work  and  each  company  has  group  insurance.  On  Jim’s   plan,  pat  is  the  dependent.  If  Jim  goes  to  the  hospital,  his  plan  pays   first  &  if  money  is  still  needed  Pat’s  plan  will  pay  the  rest.  You  do  NOT   get  double  benefits   • COBRA  –  key  provision  –  COBRA  is  good  for  36  months!!!  You  can  continue   coverage  for  3  years   • Dental  insurance   • Cafeteria  plans   • Life  insurance   o Non-­‐forfeiture  options:   § Guaranteed  cash  value   § Reduced  paid  up  insurance   § Extended  term   • Settlement  options  specifically  life  income  –  cash,  fixed  amount,  fixed  period,   life  income   o Life  income-­‐  more  than  one  person   § Joint    &  survivor   • Variable  annuities  –  surrender  charge  =  money  you  do  not  get  back   o You  can  have  a  variable  annuity,  where  when  you  go  to  cash  in,  you   will  NOT  get  all  of  your  money  back  b/c  there  is  a  surrender  charge,   say  4%,  which  you  will  not  get  back  OR  upfront  load  that  you  will  NOT   get  back   • Minimum  required  distribution  from  an  IRA   • Hospital  policy  –  what  is  covered?   • Roth  IRA  –  taxed  on  contributions,  but  not  when  the  benefits  are  withdrawn   from  the  account   • Disability  income  insurance     o Elimination  period  –  0  days  for  accidents,  7  days  for  sickness   • Non  cancellable  and  guaranteed  renewable  –  best  policy   • Residual  disability   • Social  security  retirement     • Yearly  renewable  term  insurance  –  premiums   o Premiums  get  more  and  more  expensive  as  you  get  older   • Characteristics  of  term  insurance  –  term  insurance  has  no  cash  value   o Benefit  paid  if  insured  dies  during  the  policy  period   o When  time  period  is  over,  no  more  protection  unless  you  renew  it   o No  savings  component   • Ordinary  life  insurance   • Limited  payment  life  insurance   • Entire  contract  clause  –     o Consists  of  this  policy,  any  attached  riders,  &  the  attached  copy  of  this   application   • Suicide  clause  –   o Suicide  of  the  insured,  while  sane  or  insane,  within  two  years  of  the   date  of  issue,  is  NOT  covered  by  this  policy.  In  that  event,  this  policy   will  end  &  the  only  amount  payable  will  be  the  premiums  paid  to  us,   less  any  loans   • Grace  period  –     o allow  31  days  from  the  due  date  for  payment  of  a  premium.  All   insurance  continues  during  this  grace  period.  Once  the  grace  period   ends  &  you  still  haven’t  paid,  the  policy  lapses   • Assignment  –  absolute  &  collateral     o While  the  insured  is  living,  you  can  assign  the  policy  or  any  interest  in   it.  As  owner,  you  still  have  the  rights  of  ownership  that  have  not  been   assigned.     • Characteristics  of  an  annuity   o Contributions  into  an  annuity  are  NOT  tax-­‐deductible,  you  will  pay   taxes  on  contributions   o Guaranteed  income  for  life,  you  cannot  outlive  an  annuity   • Deferred  annuity   • Disability  payments  –  difference  between  partial  disability  and  total   disability   • Social  security  issues   • Group  insurance  –     o begins  with  one  contract  (the  master  contract),  low  cost  since  there  is   only  one  policy  and  employees  get  certificate,  no  proof  on  insurability   is  need  which  means  you  could  have  a  pre-­‐existing  condition  &  still  be   covered,  paid  by  payroll  deduction   • Qualified  plans  –  eligibility     o You  could  manipulate  eligibility  with  years  of  service     o IRS  rules  –  age  21  and  1  year  of  service  needed  to  be  eligible   • Dual  definition  of  disability     o Own  occupation  –  if  you  cannot  perform  the  duties  of  your  current   job,  but  you  may  be  able  to  do  duties  of  a  different  job   o Any  occupation-­‐  cannot  perform  any  job  duties  that  you  are  qualified   to  do  by  education  or  experience   o Dual  definition  only  applies  for  one  year   o In  year  2,  reasonable  fitted   •  Keo  plan  –  must  be  self-­‐employee   • 403(b)  plan  –  tax  deferred  retirement  plan  for  government  organizations  or   public  universities     • Cliff  vesting  –  you  have  to  be  with  the  company  for  so  many  years  before   your  money  is  vested  (belonging  to  you)   Yrs  of  Service     Vested   1 0%   2 0%   3 0%   4 0%   5 100%   • Qualified  retirement  plans  –  tax  characteristics   • How  long  is  an  annuity  paid  for?   o Annuities  are  guaranteed  for  life             Social  Security   Reasons  for  Social  Insurance:   o To  help  solve  a  social  problem   o To  provide  coverage  for  perils  that  are  difficult  to  insurance     o To  provide  a  base  of  economic  security   Basic  Characteristics  of  Social  Insurance:   o Compulsory  –  you  must  participate,  no  choice   o Floor  of  income   o Benefits  loosely  related  to  earnings  –  the  higher  your  earnings,  the  higher  the   benefits  are,  but  you  do  NOT  get  back  exactly  what  you  contributed   o Benefits  are  prescribed  by  law   o Social  adequacy  stressed  over  individual  equity   o No  needs  test  –  no  proof  of  insurability     o Full  funding  is  not  necessary  –  the  assets  are  not  sufficient  to  cover  all  of  the   liabilities     o Financially  self-­‐supporting   • Earmark  tax   • Paid  by  employer  and  employee     Things  you  need:   • SSAN  –  social  security  number     • Earnings   • Quarter  of  coverage  –  3  month  period  where  you  have  earned  money  that  is   above  the  minimum  requirement     • Insured  status   o Fully  insured  –  need  40  quarters  of  coverage,  the  earliest  you  can  get   it  is  within  10  years  of  working   § Need  this  to  qualify  for  retirement  benefits   o Currently  insured  –  begin  at  age  21,  you  have  to  only  have  1  ½  years   of  working  &  paying  SS  taxes   § Need  this  to  qualify  for  survivor  benefits   • AIME  –  Average  Index  Monthly  Earnings   • PIA  –  your  retirement  benefit     SS  Retirement  Benefits   • Normal  Retirement  age  =  67   • Must  have  40  quarters  of  coverage   • Early  retirement  results  in  lower  benefits  (if  you  retire  prior  to  age  67)   o Subject  to  earnings  test:  if  you  continue  to  work  and  earn  too  much,   you  SS  check  will  be  reduced   • Late  retirement  results  in  greater  benefits  (after  age  67)           Issues  with  Social  Security   • Third  rail  –  no  political  party  wants  to  try  and  reform  the  SS  system   • Death  –  forget  to  figure  in  the  people  who  die  before  they  receive  SS  benefits   o All  the  money  you’ve  paid  into  social  security  is  gone,  if  you  die  before   you  start  receiving  payments   • Fertility  –  the  fertility  rate  is  lower  than  2.1,  if  each  women  has  2  children   then  that  would  replace  the  wife  &  husband.  Fewer  children  born  means   fewer  people  paying  into  SS   • Women  –  women  work  fewer  years  because  of  child  bearing,  women  are  paid   less,  live  longer  than  men   • COLA  –  cost  of  living  adjustment  (needs  to  be  greater)   • Longevity  –  people  are  living  longer   • Workers     • Funding   • Entitlement   • Raided   • Welfare   • Private  accounts  –  if  you  put  in  1.5  million  into  SS  and  you  both  die  before   retirement,  none  of  this  money  is  paid  out     How  to  solve  problems  today?   • Increase  taxes  each  year   • Gradually  increase  full  retirement  age  from  67  to  68   • Change  the  adjustment  of  cost  of  living  to  account  for  health  care        


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StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.