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CFP Exam - BIF Exam Prep > BU - Insurance > Flashcards

BU - Insurance Flashcards

(63 cards)

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1
Q

HDHP and HSA

A

Will be on tables
Remember to be a HDHP, must be between the minimum deductible and max out of pocket amounts
Max out of pocket included deductible
Last month rule: if eligible on Dec 1, then can fund HSA for entire year

20% tax penalty on distributions that are not qualifying

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2
Q

Qualifying events for COBRA

A

The death of the covered employee
The termination of employee (except gross misconduct)
A reduction in EE hours so that they or dependents is ineligible for coverage
The divorce or legal separation of the covered employee and spouse
For spouses and children, the EE becoming eligible for Medicare
A child ceasing to be an eligible dependent under the plan

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3
Q

Cost of COBRA cannot exceed

A

102% & must be paid monthly

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4
Q

Max period of COBRA coverage

A

Termination other than gross: 18 months
EE or beneficiary meets SS definition of disability: 29 months
All others: 36 months

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5
Q

COBRA applies to ERs with XX number of employees

A

20+ employees

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6
Q

LTC Facilities (2)

A

Nursing Home Care (Private/Semi)

  • Residential, higher level than Assisted Living
  • Personal care, health support, rehabilitation, medication, 24-hour

Assisted Living Facility (ALF)
-Residential, personal care, health support

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7
Q

LTC: Community

A

Adult Day Health Care

  • Residential
  • Socialization, structure, supervision
  • May include medical management
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8
Q

LTC: Home

A

Home Health Aide Services
-Personal care, non-medical

Homemaker Services

  • Household tasks & errand
  • “hands-off” approach
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9
Q

What does Medicare pay for?

A

Skilled nursing care for a limited time following hospitalization
Days 1-20: $0 co-pay for each benefit period
Days 21-100: patient pays $194.5 coinsurance per day
Days 101+: Patient pays all costs

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10
Q

Long Term Care Insurance Features & Benefits

A

Benefit period - how long the policy will pay benefits
Elimination period - waiting period before benefits start
Daily benefit - max amount policy will reimburse for daily services
Riders - add-on features (inflation protection)
Waiver of premium - insured does not pay premiums while receiving benefits
Renewability - most are guaranteed renewable

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11
Q

Qualified LTCi Required Features

A

Benefits payable only for qualified LTC services
Contract must be guaranteed renewable
Contract does not pay or reimburse expenses reimbursed under Medicare
Contract does not provide for a cash surrender value
Policy dividends must be applied as a reduction in future premiums or increase future benefits
Limitations and exclusion are prohibited (except pre-existing within 6months of application)
Contract cannot provide for skilled nursing care only or require prior hospitalization
Contract must have 2 yr incontestable clause for misrepresentation

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12
Q

Qualified LTCi Tax benefits

A

Benefits are received tax-free
Premiums paid are a qualified medical expense for itemized deduction for medical expenses
Premiums can be paid from HSA
Premiums paid by ER are tax-free to EE and benefits remain tax-free

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13
Q

Qualified LTCi Benefit Triggers

A

2 of 6 ADLs 90+ days
Substantial cognitive impairment

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14
Q

ADLs

A

Bathing
Eating
Dressing
Continence
On/Off Toilet
Transferring

NOT: blindness or inability to walk

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15
Q

Partnership LTCi

A

Partnership between states and insurance companies for QLTCi
Provides add’l asset protection if LTCi benefit is exhausted and insured files for Medicaid
Total amount paid under LTCi is added to Medicaid spend-down limited and protected

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16
Q

Pooling Feature of LTCi

A

If the daily benefit is $300/day and the benefit period is 2 years, but the need is only $200/day, then the excess can be pooled and lengthen the benefit period

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17
Q

Disability Insurance Taxation

A

Who is paying the premium?
ER pays the premium & does not include as comp to EE > benefits are taxable
ER pays the premium & includes as comp to EE > benefits are tax-free
EE pays the premium with after-tax dollars > benefits are tax-free
EE pays the premium with pre-tax dollars > benefits are taxable

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18
Q

Types of Life Insurance

A

Term Life Insurance
Whole Life Insurance
Universal Life Insurance

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19
Q

Term Life Insurance

A

Lowest premium at issue
No cash value
May be participating (dividends)
May be renewable
May be convertible to permanent

Level Term: death benefit remains level over the guaranteed term, premiums increase upon expiration

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20
Q

Whole Life Insurance

A

Higher premium than term
Guaranteed death benefits
Builds cash value
Cash value accessible by loans or withdrawals
May be participating (dividends)

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21
Q

Universal Life

A

Most flexible
Option A- death benefit remains level
Option B- death benefit is face amount + cash value
Variable UL offers to pay random add’l amounts into the policy

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22
Q

Life Insurance Termination (non-forfeiture options)

A

Cash Surrender Value - ins company pays the cash value to the policy owner as a lump sum and end contract

Extended-term option - the policy owner uses the cash value to place the policy on extended term ins; serves as a single premium to pay for term life ins. The level of coverage is maintained, but maybe not for the life expectancy

Reduced paid-up Ins - cash value is used to buy a paid-up policy of the same type as the policy that lapsed. The new policy will have reduced death benefit but will retain a cash value that will grow at a reduced rate

Some ins company allow to convert the policy to an immediate single premium annuity that will pay out the rest of the life

An automatic premium loan allows the insurer to make a loan against the cash value for paying the overdue premiums, assuming the cash value is more than the amount due

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23
Q

Variable Life subaccounts

A

are not part of the insurance company’s general assets and are protected from the insurance company creditors

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24
Q

Modified Endowment Contracts

A

Curtails the use of single premium life insurance as a tax-free income investment

Policy becomes MEC if fails the 7-day test and changes the tax treatment of living distributions

7-pay test is applied at inception of policy and after any material changes

Fails 7-pay test if total premium paid exceeds the sum of the net level premium needed to result in a paid-up policy after 7 years

10% penalty will apply for any loans or distributions if taxpayer is under 59.5

Once a MEC, always a MEC

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25
Viatical Settlements
Insured must be terminally or chronically ill Viatical provider must provide 15 day cooling off period, which the viator can rescind policy Payment to insured is not included in gross income if terminally ill or if used for long-term care for chronically ill Viatical provider is taxed on the death benefit that exceeds basis. Basis= payment to insured + any premiums received
26
Terminally ill & Chronically ill
Terminally ill is certified by a physician with condition that will likely result in death within 24 months of date of certificate Chronically ill is unable to do 2 of 6 ADLs for 90 days
27
Buy-Sell: Cross Purchase Agreements
Advantages: Simple for small firms Death benefits pass tax free to surviving owner **Increase in basis for surviving owner (this is a big advantage over entity)** Disadvantages: Young owners pay a higher premium on older owners Difficult to implement in large firms # of contracts needed is # of employees x (# of employees -1)
28
Buy-Sell: Entity Purchase
Advantages: Large firms Death benefit passes tax free to business Business pays premiums Disadvantages: **No increase in cost basis for surviving owners** Surviving owners will have large gains upon sale
29
Buy-Sell: Wait and See
Can be a cross purchase, entity or hybrid policy Step 1: business has first option to purchase deceased’s stock Step 2: other owners have the option to purchase if the business waived or bought less than half Step 3: business is required to purchase the remaining stock
30
1035 Exchanges
LEAQ Life Insurance to Endowment to Annuity to Qualified LTCi
31
3 ways annuities can be purchased
Installment premium Single premium Flexible premium
32
When can payment begin for annuities?
immediately (within 12 months) or Deferred (after 12 months)
33
How are funds invested in annuities?
variable, fixed or equity indexed Variable has different subaccounts and these are not part of general accounts and subject to insurance company creditors Equity Indexed links returns to the market indexes, participation rate, cap and floor
34
Forms of payments from annuities
Withdrawals - full or partial, or systematic Life annuity Annuity Certain - fixed period or fixed income
35
Which annuitization option provides the highest income?
life only, but ends at death
36
how are distributions from annuities treated?
ordinary income on gains how that income is recognized is based on the annuity payout: withdrawals or annuitization Withdrawals have a LIFO based tax treatment & subject to 10% penalty prior to 59.5 annuitization uses the exclusion allowance until basis is recovered
37
Annuity exclusion allowance
basis/ (annual payment x life expectancy) = tax free portion of annuitization payment exclusion allowance is applied from each payment until the basis is recovered
38
Annuitizations prior to what date applies the exclusion allowance for life
Dec 31 1986
39
Withdrawal are LIFO base, except
withdrawals on an annuity purchased prior to 8/14/1982
40
Annuities have a 10% penalty on withdrawals prior to 59.5 except
Owner is disabled Owner dies Immediate non-qualified annuity Substantially equal periodic payments later of 5 years or owner reaches 59.5
41
Section 1035 Exchanges
LEAQ can exchange a policy for one similar or down, but you cannot exchange up. is used primarily to defer current taxation. Life Insurance Endowment Annuity Qualified LTCi
42
Homeowners Insurance: Policy Forms (6)
HO-02: Broad Form - Basic Homeowners Coverage HO-03: Special Form - Better Homeowners Coverage (open peril dwelling, named perils contents) HO-04: Contents Broad Form - For renters (contents only) HO-05: Comprehensive Form - BEST Homeowners Coverage (open peril dwelling, open perils contents) HO-06: Unit Owner Form - Condo owners - Studs In HO-08: Modified Coverage - Historical Homes Add HO-15 to HO-03 to get HO-05 coverage (3x5=15)
43
Named Perils v. Open Perils
Named: Coverage specifies perils or “causes of loss” that are covered - the rest is not Open: coverage specifies excluded perils from coverage, the rest are covered
44
Parts to Policy Forms (6)
A - Address B - Backyard C - Crap D - Displacement E - Exposure F - Funds for medical
45
Coinsurance Clause
Requirement that a dwelling be insured for at least 80% of the replacement cost for a partial loss to be paid in full
46
If dwelling is insured for 80% of replacement cost, the policy pays
The lesser of the actual cost to repair damage or replace the building OR the stated limit of coverage under the policy
47
If dwelling is insured for less than 80% of the replacement cost, the policy pays
The greater of the actual cash value of the damage (replacement - depreciation) OR portion of the lost that is equal to the insurance maintained instead of 80%
48
Coinsurance Formula
[(Did have / should have) x loss amount] - deductible
49
Personal Auto Policies: Part A Liability
1. Single Limit - one $ cap per incident 2. Split Limit - Max bodily injury/max all bodily injuries/max property damage
50
Personal Auto Policies: Part D, damage to my auto
Collision - damage to vehicle caused by an accident Comprehensive - all other physical damage (deer)
51
Personal Liability Umbrella Policy
addition to a clients property or casualty coverage Provides add'l liability coverage above and beyond the underlying limits of one's home or auto coverage Typically requires the insured to maintain stated minimum coverage limits - extends to boats Pays after the underlying policy limits have been exhausted DOES NOT COVER BUSINESS INTERESTS Typically covers cost of defense
52
Direct losses are
the *immediate*, or *first, result* of an *insured peril*. For example, if a fire destroys a home, the loss of the home is the direct loss.
53
Insurance is
refers to possibilities that can result in only loss or no change. Insurance deals only with pure risks.
54
insurance needs approach is based on person's income earning ability
Human Life Value
55
The *McCarran-Ferguson Act*
expressed the intent of Congress to allow the states to continue to regulate and tax the business of insurance. It found such continued state regulation to be in the public interest provides a limited exemption to the insurance industry from the federal antitrust laws The Act provides that the *Sherman Act*, the *Clayton Act*, and the *Federal Trade Commission Act* apply to the business of insurance “to the extent that such business is not regulated by state law.”
56
*Gramm-Leach-Bliley (GLB) Act*
The overriding purposes were to modernize the U.S. financial services markets, to formalize the regulation of these markets, and to make the markets more competitive, thereby providing benefits to consumers.
57
The forces underlying the passage of GLB included the following:
* Consumer needs * Banks wanting to expand the scope of the financial services they could offer * International competition * Technology
58
Firm(s) that provide(s) financial ratings of insurance companies
* A.M. Best Company, * Standard & Poors, * Moody’s Investor’s Services, * Duff & Phelps, and * Weiss Research.
59
*Merritt Committee Investigation*
(NY Mets) New York investigated its fire insurers in the *Merritt Committee Investigation*. The results again revealed many unethical and undesirable characteristics.
60
*South-Eastern Underwriters Association (SEUA)*
case, the U.S. Supreme Court reversed its historical position rendered in Paul v. Virginia. It now concluded that insurance was indeed interstate commerce.
61
definition of disability in a disability income insurance policy has the most stringent underwriting requirements
Own occupation
62
HO-03 homeowners policy perils covered
Dwelling – named perils; contents – open perils
63
type of disability income coverage has the most difficult definition of disability to satisfy in qualifying to receive benefits
Social Security disability

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