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CHAPTER 5: RISK MANAGEMENT & LIFE INSURANCE - Coggle Diagram
CHAPTER 5: RISK MANAGEMENT & LIFE INSURANCE
INSURANCE PLANNING
Definition Insurance:Insurance is protection against possible financial loss; it gives you peace of mind
TYPE OF RISK
Hazard: Factors increasing the likelihood of loss (defective wiring)
Peril: Cause of loss (fire, theft, accidents)
Speculative Risk: Risk of both loss or gain, Uninsurable risk.
Risk: Uncertainty or lack of predictability
Personal, Property, and Liability Risks
Pure Risk: Insurable Risk, Accidental & unintentional, Predictable Financial loss
Risk Management Methods
Risk Reduction: Minimize risks ( safety measures like seat belts)
Risk Assumption: Self-insurance (saving money to cover losses)
Risk Avoidance: Eliminate risk ( not engaging in hazardous activities)
Risk Shifting: Transfer risk to insurance ( paying premiums)
Risk Management Strategies
Examples of Risks:
llness: Medical expenses
Strategies: Health insurance, health behaviors
Death: Loss of income, funeral expenses
Strategies: Life insurance, estate planning
Disability: Loss of income
Strategies: Disability insurance, savings
Property Loss: Repair or replacement of property
Strategies: Homeowner’s insurance, flood insurance
Liability: Legal expenses, lawsuits
Strategies: Malpractice insurance, homeowner’s insurance
PLANNING AN INSURANCE PROGRAM
Step 1: Set Insurance Goals (Identify risks and financial protection needs)
Step 2: Develop a Plan (Consider available resources)
Step 3: Put the Plan into Action (Use financial and personal resources)
Step 4: Check Your Results (Periodically evaluate 2–3 years)
CONCEPTS OF INSURANCE
Risk Pooling: Premiums from many policyholders are pooled, allowing the few who suffer losses to be compensated from the shared fund
Certainty over Uncertainty: Helps individuals and businesses replace unpredictable large losses with predictable smaller expenses (premiums)
Risk Transfer: The insured shifts the financial burden of potential loss (e.g. accident, illness, theft) to the insurer
PRINCIPLES OF INSURANCE
Insurable Interest: Financial loss if insured item is lost or damaged
Utmost Good Faith: Full disclosure of facts by the insured
Contract of Indemnity: Restore to the same position before loss
Contribution: Insurer’s share of multiple insurers' liability
Subrogation: Insurer can recover loss from a third party
Proximate Cause: Immediate cause of an event (e.g., fire leading to damage)
TYPE OF INSURANCE COVERAGE
General Insurance:
There are two categories of general insurance products, one which falls under the Commercial Lines offered to businesses/corporations and the second one is offered under Personal Lines, designed specifically for the public.
Life Insurance:
insurance company will pay a lump sum known as a death benefit to your beneficiaries after your death.
Types Of Life Insurance Policy
Endowment Plans: •combines life insurance and savings
•It covers us against death, Total Permanent Disability and critical illness.
Whole Life Insurance: •Lifetime coverage •Includes cash value
Term Insurance: •Coverage for a limited period
•No payout if the policyholder survives
Term vs. Whole Life Insurance
Term Insurance:
•Lower premiums
•Coverage for a limited period
Whole Life Insurance: •Higher premiums
•Lifetime coverage with cash value
Premium Comparison: Term is cheaper, whole life has higher premiums but fixed
Endowment Plan Insurance:
•Combination of Insurance and Savings:
•Lump sum payout if the policyholder survives the policy term
Type of Endowment Plan Insurance:
•Traditional (profit-sharing)
•Traditional (non-profit)
•Unit-linked (based on unit
trust performance)
Medical and Health Insurance :
• Coverage: Private medical treatment, hospitalization, surgical costs
•Exclusions:Pre-existing conditions, qualifying periods
Critical illness insurance
Disability income insurance
Hospitalization and surgical insurance
Medical Cards: Provides coverage for private hospital treatment
Annuity or Pension Plans :
•Annuity: Pays regular income after retirement
•Pension: Provides retirement income, may have various payout options
Personal Accident Insurance :
•Coverage: Accidental death, permanent disability, medical expenses
•Exclusions: Suicide, pre-existing conditions, hazardous sports
Fire/House Owner/Householder Insurance:
•Fire Insurance: Protects against fire and lightning damage
•House Owner Policy: Covers building damage
•Householder Policy: Covers contents of the home
Policy Coverage
: ire, explosion, storm, earthquake, theft
Exclusions
: Subsidence, landslip, malicious damage
Motor Insurance
:Mandatory by law for vehicles in Malaysia (Road Transport Act 1987)
Types :
•Act Cover: Minimum legal requirement
•Third Party Cover: Liability for injuries or damages to others
•Comprehensive Cover: Extensive coverage for all damages
Travel Insurance :
• Coverage: Accidental death, loss of baggage, medical expenses
•Exclusions: War, suicide, hazardous sports
•Repatriation: Return of remains after accidental death
Takaful (Islamic Insurance) :
•Concept: Mutual cooperation among policyholders
•Principles: Risk-sharing, Sharia-compliant, based on solidarity and mutual assistance
•Benefits:Peace of mind, inheritance security, and liability protection
FAMILY MAINTENANCE FUND
Purpose: The most important function is insurance as protection for our families.
Factors: The size of fund will reflect the level of living we would like to see maintained or an amount at least enough to eliminate the need for major financial
METHODS
Multiple Salary Approach
Goal: This approach has the goal of replacing the annual salary stream of a bread winner for a certain number of years, or until the children are raised and the spouse is financially stable and retired.
Coverage: Typically 5–15 times gross salary
Calculation Example: RM 60,000 annual salary = RM 600,000 coverage
Needs Salary Approach
Goal: The needs approach considers the amount of money needed to cover burial expenses as well as debts and obligations such as mortgages or college expenses.
The needs approach is a function of two variables:
→The amount that will be needed at death to meet immediate obligations.
→The future income that will be needed to sustain the household