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CFP > Insurance > Flashcards

Insurance Flashcards

1
Q

An employer cannot purchase or own a policy in a cross purchase agreement, because no insurable interest exist for the company. (stockholders buy other stockholders interest.)

A
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2
Q

Collateral source rule

A

Prevents reduction of damages awarded to to plaintiff for injury, illness, or disability by the amount already recovered from a third party such as an insurer

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3
Q

Capital retention question:

When questions is wanting you to figure cash needs after death but you dont know how many years, it’s not a TVM question. divide amount needed by expected interest rate earned.

  • Do not use real rate of return in these questions, just subtract inflation from interest.
A

Ex. need $100,000 interest rate 7%. 100,000/.07=$1,428,571.43

***DONT FORGET TO ADD AN ADDITONAL YEAR ($100,000) BECAUSE THEY WILL NEED THE MONEY AT THE BEG OF YEAR.

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4
Q

Disability Insurance

A

Typically only issues 50-60% of earned income.

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5
Q

Participating policy

A

Pays an annual dividend to the holder. Participating policy charges a larger premium. If the extra premium is not needed, it’s returned as a dividend.(generally tax free.)

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6
Q

Use A.M. Best for research and rating of insurance company. They provide details. The other companies just provide ratings

A
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7
Q

Parts of insurance policy

A

Declaration page- name, address, etc.

Section 1. Coverages:
A- Dwelling
B- other structures (10% of A)
C - personal property (50% of A)
D - loss of use (30% of A)

Section 2 coverages :
E- personal liabilitEE
F- medical payments

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8
Q

Dwelling

A

Insures any structures (such as garage decks and fences)

Land is specifically excluded

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9
Q

If using loss of use (coverage D), insurer will only pay for additional living expenses arising from damage.

Normal expenses are 2000, after fire, they are 4000 due to temporary housing and eating out, the carrier will pay the difference (2000)

A
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10
Q

Perils:

Basics form- Remember WHARVES/FLT
Broad form- everything in basic plus FAR
Open perils: the insurer agrees to pay for damage by any peril, except those specifically excluded. (usually the appropriate choice on exam because it covers unusual risk that are not named under basic or broad forms.)

A

Windstorm, Hail, Aircraft, Riot, Vandalism, Vehicles, Explosion, Smoke, Fire, Lightning, and Theft

Rupture of a system, Artificially generated electricity, Falling objects, Freezing of plumbing.

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11
Q

HO1- basic
HO2 -broad
HO3 - open except coverage C (personal property) has broad coverage
HO4 - renters
HO5 - open
HO6 - condo
HO8 - basic (for older homes)

A
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12
Q

General exclusions that apply to all homeowner forms: OPEN WIF

A

Ordinance of law, power failure, earthquake, neglect, nuclear hazard, War, intentional loss, and flood.

Sinkhole IS covered if it affects the stability of the house

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13
Q

For exam purposes, the dwelling will typically be covered under replacement cost coverage and personal property on actual cash value

A
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14
Q

The original cost is immaterial in the calculation of ACV

A

Replacement cost-depreciation=ACV???

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15
Q

Property loss calculation

A

When amount of insurance is less than 80%, insurer will pay GREATER of ACV or the below formula.

((Insurance carried/insurance required) x loss))- deductible

*replacement cost x coinsurance = insurance required

*ACV = (depreciated % x loss) - deductible

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16
Q

Out of the options: liability, medical payments, uninsured motorist, and collision - collision is least necessary for old car

A
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17
Q

Part A Liability coverage

(Test may use the abbreviated term BI/PD)

A

Bodily Injury/Property Damage

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18
Q

Umbrella Policy

A

If insurer requires 300k on a 1M policy and you only have 100k. They will only pay 700k. Insurer will pay 100k and you will pay 200k

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19
Q

Malpractice ins. vs errors/omissions

A

malpractice - used if chance of bodily injury (doctors dentists)

errors/omissions - typical if chance of property damage. (intangible property, loss of money, ect) (lawyers, financial planners, stockbrokers)

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20
Q

Taxable vs tax free benefits

A

Taxable: sick pay, unemployment

Tax free: workers comp

Tax deductible to ER: workers comp, unemployment, commercial umbrella ins, BOP policy, federal unemployment tax (FUTA), directors and officers liability. NOT key EE insurance

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21
Q

Stop loss

A

If insurance has 80/20 split and claim is $10,000 and stop loss is $5000. You pay 20% of 5000 (plus deductible)

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22
Q

Medicare (65 and over)

A

Part A: hospital.

Part B: medical

*if entitled to SS disability for 24 mos, then they’re covered under Medicare. Regardless of age!

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23
Q

Medicare Part A (Hospital)

A

Inpatient hospital care is limited to 150 days for one stay and subject to deductibles.
- Post hospital extended care in a skilled nursing home for 100 days

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24
Q

Medicare Part B (Medical)

A

Voluntary. free preventative care exams. Financed by monthly premiums and contributions from govnmt. Deductible and then Medicare pays 80% of balance of approved charges. No stop-loss. So patient has significant financial exposure (20% of unlimited amount)

Self-administered drugs not covered under Part B.

Excluded from Part B - dental, exams for eyeglasses or hearing, most immunizations (covers 1 flu shot a year)

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25
Q

Medicare Part D

A

usually drug manufacturers must provide 50%. person must have Part A and/or B

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26
Q

Medigap

A

This can cover the 20% gap after medicare B pays. You can only be sold 1 medigap policy at a time. You can’t buy Medigap if you only have Part A, Medigap no longer offers any prescription coverage plans. You can buy Medigap at any time during 6 mos period after INITIAL enrollment for Part B

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27
Q

HMO

A

must go through gatekeeper and you’re not covered if you go through provider other than HMO.

fixed premium

Emphasize cost containment

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28
Q

PPO

A

health care providers generally are paid on a fee for service basis as needed.
EE are NOT required to use doctors or facilities of PPO. They can go out of network but then benefits are generally reduced.

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29
Q

COBRA

A

voluntary or involuntary termination, or changing from Full-time to Part-time = up to 18 mos
EE death, divorce, legal separation or eligibility for Medicare= up to 36 mos.
loss of dependent status (marriage, reaching dependency age limit specified by plan) = up to 36 mos.

disability = 29 mos

** must elect COBRA within 60 days and pay premium with 45 days

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30
Q

HSA

A

ER and EE contributions are aggregated.

Penalty for non medical dist under 65 is 20%. Over 65 is no penalty, but taxed at ordinary income rates.

Most OTC drugs now apply, NOT vitamins or supplements

Can be used to pay for retiree health insurance premiums, cobra, and qualified, long-term care premiums

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31
Q

Noncancelable

A

Guaranteed to keep policy in force as long as you pay premium and premium will not increase

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32
Q

Guaranteed Renewable

A

Guaranteed to keep policy in force as long as you pay premium BUT the premium MAY increase

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33
Q

Conditionally renewable provision

A

allows a noncancelable or guaranteed renewable policy to continue beyond age 65.

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34
Q

underwriting a disability policy

A

may require you to provide, earned and unearned income, net worth, and current disability coverage. NOT cash flow statement

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35
Q

SS has a 5 month waiting period (you get benefits the 6th month). However, a disabled person generally must wait for 12 months because Social Security will not pay if disability lasts less than 12 months.

A
36
Q

Social Insurance Substitute benefit (SIS)

A

For total disability, monthly Benefit will be SIS less any social security disability payments.

They always get the base benefit of the disability policy

37
Q

Disability paid by ER

A

If it’s under a bonus arrangement (section 162) and owned by EE, benefits, are tax free

If it’s under a salary continuation plan and owned by the employee, benefits are taxable

If it’s under a S corp or partnership - benefits tax-free and ER can deduct

38
Q

Long term care insurance eligibility

A

chronically ill is certified by meeting one of the following:
- unable to perform at least 2 activities of daily living for at least 90 days.
- substantial cognitive impairment (alzheimer’s disease, strokes, or other brain damage)

ADLs - eating, bathing, dressing, transferring from bed to chair, using the toilet, and maintaining continence.

39
Q

Inflation protection on LT care

A

if elected, daily benefit can increase by simple or compound interest. (expensive)

If the test asks which provision of LT care is most important, it is inflation protection.

40
Q

FSA cannot be used to reimburse premiums for LTC, but HSA’s can. pay QUALIFIED premiums and LTC expenses.

A
41
Q

qualified LTC must be guaranteed renewable and cannot be cash value policies.

A
42
Q

To qualify for skilled nursing benefits under Medicare Part A (Hospital)

(must meet all)

A

requires skilled nursing

been in hospital at least 3 days in a row before admission to skilled nursing facility

patient is admitted to skilled nursing facility within short time (usually 30 days)

Patients care in the skilled nursing fac is for a condition that was treated in the hospital

Medical professional certified the patient needs skilled nursing care

43
Q

Skilled nursing coverage

A

First 20 days are paid in full by Medicare. Days 21-100 have a copay (patient pays $194.50 per day), after 100 days, the patient is fully responsible.

To qualify for skilled nursing facility reimbursement, the patients condition must improve within a predictable time. (Thus, Alzheimer’s coverage is excluded)

44
Q

What other means provide nursing home care coverage for longer than 100 days?

A

Medicaid.

Medicare is limited to 100 days Medicare supplement policy or Medigap insurance may provide for rehab stay but not nursing home coverage

45
Q

Medicaid

A

Generally will not qualify unless they have less than $2000 in assets.

Generally ineligible for coverage if they give money or assets away within five years of incurring nursing home expenses.

If they have annuities, they must name their state as remainder beneficiary to cover expenses .

46
Q

Needs analysis vs. human life value

A

Needs analysis compares needs to resources available.

Human life value is present value of income lost by insureds death.
(doesn’t consider other resources available for income and cash needs)

47
Q

Annual Renewable Term

A

provides protection for one yr at a time and insured does not have to provide evidence of insurability each year. But, the premium increases each year.

48
Q

Decreasing term

A

level premium, amount of death benefit decreases.

49
Q

Reentry

A

Requalify for low cost premium through abbreviated underwriting

50
Q

Universal life insurance

A

Premiums, cash values, and the level of protection, can be adjusted up or down during life to meet needs.

51
Q

Level death benefits (also filled option A or Type I)

A

Death benefit is constant unless cash value exceeds certain benchmark. Then, the death benefit would increase

Assume cash value goes away at death unless they tell you it hit a breakpoint.

52
Q

Increasing death benefits (option B or Type II)

A

As cash value increases, so does death benefits by the same amount.

53
Q

Agents must be FINRA licensed (at least a series 6) and life insurance licensed, in order to sell variable life insurance

A
54
Q

Variable life

A

Policy owner can direct investment options

Cash value is invested in separate account. This account will not be frozen if insurance carrier gets into legal issues. (The general account can be frozen)

55
Q

Second to die/survivorship life

A

Main usage is to provide liquidity to pay federal estate taxes at death of second spouse.

56
Q

In determining whether a variable life policy is suitable, risk tolerance is the most important factor

A

Low risk tolerance should consider purchasing whole life

57
Q

Cash value component, along with growth potential of the variable life policy is often the best solution for funding a buy sell agreement

A
58
Q

Suicide clause

A

If insured commit suicide, during the first two years, the insurer will be liable only for a return of premium

59
Q

Dividend options

A

CRAPO
Cash
reduction of premiums

Accumulated with interest- dividends go into interest bearing account (interest is taxable).

Purchase paid up additions - each dividend is used to purchase a small amount of fully paid up whole life insurance. (Paid up insurance is different. It’s a non-forfeiture option)

One yr term - (AKA the fifth dividend option)

60
Q

Non-forfeiture option

A

Cash- policy can be surrendered at any time for its cash value, less any policy indebtedness plus accumulated dividends.
Reduced paid up - face amount of policy will be reduced. Death benefit will be the amount the cash value would purchase as a net single premium. no additional premium is due.
Paid up term - (also called extended term) policy continues in force for as long as the cash value will permit.

61
Q

Settlement options

A

Cash- Owner or beneficiary takes lump sum
Interest - proceeds are temporarily retained by insure, and only interest is paid
Installments for fixed period - proceeds plus interest paid over fixed period
Installments of a fixed amount
Life, income options

62
Q

NAIC has no legal power over insurance regulation. However, it enables state commissioners to exchange information and coordinate regulatory activities.

A

-oversees st accreditation program
-promotes law and regulation uniformity
-Transmits information to regulators
-Protects the interest of policy owners while preserving state regulations

63
Q

Viatical settlement

A

terminally ill (expected to live two years or less) - can take him out early and be tax free

Chronically ill - tax free distribution that can only be used for cost incurred for qualified long-term care services

64
Q

Surrendering a life policy

A

Cash value less loan

(Taxable amount is guaranteed cash value less the net premiums that were actually paid)

(If premiums billed were 60,000 and dividends used to reduce premiums were 10,000, then the net premiums is 50,000. ) If you elect to reduce premiums it reduces your basis)

65
Q

MEC (Modified Endowment Contract)

A

Must meet both of following:
-Entered into after June 21,1988
-fails to meet the seven pay test (excess premiums paid in the first 7 years)

*Death benefits from MEC are tax free
**A single premium policy issued after 1988 is always a MEC on the exam

** difference between MEC and on MEC is that loans and withdrawals are generally not taxable. (there’s also a 10% penalty if under 59 1/2)

66
Q

if life policy increases MORE than $150,000 in grandfathered life ins policy, it would lose it’s grandfathered status.

Also if you increase policy by any amount you may need to provide evidence of insurability and could lose grandfathered status.

A
67
Q

Transfer for value

A

This is the exception to death proceeds being excluded for federal tax purposes.

If it’s a cross-purchase arrangement and someone dies, you can only buy the portion on yourself. (also, if you’re retiring, buy your own policy back)

If it’s a partnership, then you can transfer life ins to other partner (that’s an exception)

68
Q

A gift of policy to family member is not a transfer for value because no consideration is received.

A

a sale of policy to family is not taxable but does cause a transfer for value

69
Q

Buy-Sell Agreement

A

Usually funded by life insurance. Provides liquidity for estate tax purposes. Is one of the two following types:

Can be a stock redemption (entity purchase) or a cross-purchase agreement

stock redemption (entity purchase) - practical with multiple owners. Corp is owner and beneficiary. Premiums are not deductible so death benefits are tax free. Deceased shareholder stock gets stepped up basis. The remainder stock does not.

Cross purchase - you get a full step up in basis at death (in entity, just the deceased person share gets a step up)

70
Q

if its a disability buy-sell agreement, then you realize capital gains on anything above basis at time of disability

A
71
Q

Split dollar plan

A

endoRsement method: ER owns the policy and responsible for premium. Bene is named to receive balance of death benefit. ER gets cash value or premiums paid (whichever is greater) at death.

collateral aSSignment method: insure EE is the owner. corp lends the EE the corp’s share of the premium. Loan amount is secured by assignment of the policy to the corp. At death - ER receives premiums paid and bene gets balance of death benefits.
At surrender - EE gets cash value balance.

**if questions is asking who the primary bene is, they are asking who gets the premiums paid or cash value

***Collateral assignment is disadvantage to ER because they do not get back excess cash values.

72
Q

Business Overhead Expense Insurance (BOE)

A

Policies cover the ongoing costs of operating a business while owner is totally disabled. Ownly expenses, not salary is reimbursed.
-IF you are self employed: premiums paid on BOE are deductible and thus proceeds would be taxable.
-If youre a S corp or regular corp - they are not deductible thus the proceeds would be tax free.

73
Q

Pure life immediate fixed annuity

A

guaranteed income stream, no residual value at death so nothing would be subject to estate tax, and this type of annuity has the highest payout.
disadvantage - there is no inflation hedge. a fixed annuity payout can lose most of it’s purchasing power in 30-40 years.

*When you pay for a pure life annuity, it is removed from your estate.

74
Q

Joint life annuity vs. joint and survivor annuity

A

Joint and survivor is computed based on two lives. Joint life ceases at the first death

*Joint life annuity is seldom recommended.

75
Q

Both an insurance and a security license are required to sell variable annuity (or variable life insurance)

A
76
Q

if question is asking you to pick annuity type and says “attempts to cope with inflation” or “keep up with market conditions”, variable annuity is usually the right answer.

A
77
Q

Taxation of annuity

A

if held by non-natural entity, then income received each year must be taxed as ordinary income.

78
Q

Group permanent policy does not meet the requirements to be treated as group life insurance. EE is taxed (w-2 income) (compensation income) on the premiums paid by the ER if proceeds are payable to bene named by the EE

Compensation income - is subject to FICA or self-employment taxes. Ordinary income like interest, dividends, and capital gains are not subject to FICA or self-employment taxes. (FICA -7.65%)

A
79
Q

Discriminatory group life plans lose their 50,000 exemption. Also, ER does not get 50,000 exemption if they name themselves (the company) as bene.

A
80
Q

Group permanent policy

A

ER can deduct premiums if the EE has non-forfeitable right to the policy.

81
Q

EE can do absolute assignment (give up all rights) of group term policy. If they can do this before 3 yrs of death, it will not be included in estate.

A
82
Q

At termination of employment, you can continue your group life policy by converting it to any type of PERMANENT contract offered by carrier. NOT term.

A
83
Q

IRC Section 162 bonus plan

A

EE purchases and owns the life insurance. ER pays premiums and gets the deduction, the premiums are taxable income to EE

84
Q

disability payments have a elimination period. If it’s 90 day wait, you get benefits starting month 4

A
85
Q

If questions asks which arrangement does this appear to be and mentions it’s a whole life, do not pick a term policy.

A
86
Q

Dependent care FSA is for 12 and younger. not 13

A
87
Q

Long-term care premiums are not qualified to be paid through FSA that can be paid through HSA

A

CFP (7 decks)

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