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KB CFP March 2024 > Insurance > Flashcards

Insurance Flashcards

1
Q

Method to Control Losses: Avoidance

A
  • rent instead of purchasing property
  • avoid buying home with a swimming pool
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2
Q

Method to Control Losses: Diversification

A
  • store assets at different locations
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3
Q

Method to Control Losses: Reduction

A
  • install sprinklers, smoke detectors, burglar alarm for home
  • create safety programs for businesses
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4
Q

Method to Control Losses: Retention

A
  • deductibles in insurance policies
  • coinsurance in insurance policies
  • self-insurance
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5
Q

Method to Control Losses: Transfer

A
  • insurance
  • hold harmless agreements/hedging contracts
  • incorporation of business
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6
Q

High loss Severity, Low loss Frequency

A
  • risk transfer (purchase insurance)
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7
Q

High loss Severity, High loss Frequency

A
  • avoidance (insurance premiums would be prohibitive)
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8
Q

Low loss Severity, High loss Frequency

A
  • retention or reduction (high frequency implies transfer will be costly)
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9
Q

Low loss Severity, Low loss Frequency

A
  • retention (seldomly occurs, when they do, financial impact is minimal)
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10
Q

Negligence: Attractive Nuisance

A
  • swimming pool, vacant lot
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11
Q

Negligence: Negligence per se

A
  • violation of statute
  • examples: school zone, crosswalk, etc
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12
Q

Negligence: Strict Liability

A
  • product liability
  • think firestone tires
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13
Q

Negligence: Absolute Liability

A
  • worker’s compensation
  • keeping wild animals
  • extra hazardous
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14
Q

Negligence: Vicarious liability/Repondeat Superior

A
  • principal responsible for agents
  • one person is held liable for the behaviors of another
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15
Q

Defenses: Assumption of Risk

A
  • skiing, stock car races
  • cannot hold someone else liable for taking on
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16
Q

Defenses: Contributory

A
  • jaywalking
  • drunk driving
  • any negligence on part of the injured party
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17
Q

Defenses: Comparative

A
  • A is 20% negligent
  • B is 80% negligent
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18
Q

Defenses: Last Clear Chance

A
  • road rage
  • had a last clear chance to avoid
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19
Q

Property Loss Calculation

A
  • replacement cost x coinsurance percentage = insurance required
  • [insurance carried / insurance required x loss] - deductible = amount paid by insurer

greater of that calculated and ACV is paid unless greater than 80%, then only formula is paid

*ignore land

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20
Q

Insurance Requirements for Homeowners and Commercial

A
  • homeowners requires 80%
  • commercial requires 90%
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21
Q

Actual Cash Value

A
  • ACV = replacement cost - depreciation
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22
Q

Definition of Non-cancelable (noncan)

A
  • can never raise the premium
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23
Q

When to recommend Term Insurance

A
  • limited time for protection
  • dollars available for coverage are limited
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24
Q

When to use Limited Pay Whole Life Insurance

A
  • when client has a long-life expectancy
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25
Q

Capital Retention Calculation

A
  • life insurance need = [yearly income/inflation] + first years’ income
26
Q

Actual Cash Value (ACV)

A
  • replacement cost - depreciation
27
Q

When to use Replacement cost vs Actual Cash Value

A
  • replacement cost = dwelling/structure
  • actual cash value = personal property
28
Q

HSA Penalty (under 65)

A
  • 20%
29
Q

Owner or S Corp

A
  • tax free benefits
30
Q

Taxation of LTC Premiums (51-60)

A
  • $1,790/yr
31
Q

Taxation of LTC Premiums (61-70)

A
  • $4,770/yr.
32
Q

When to Use Limited Pay Whole-Life

A
  • long-life expectancy while insured
33
Q

Non-Forfeiture Options (Giving up Policy)

A
  • cash
  • reduced paid up (face value is reduced)
  • paid up term/extended term (policy lasts as long as cash value allows
34
Q

Taxation of Whole Life

A

policy face value
(+) paid up additions
(-) loans
= Policy Death Benefit
(+) one year term
= entire death benefit

35
Q

Simultaneous Death Act

A
  • pre decease each other
36
Q

Transfer for Value (Not a gift, sold)

A
  • transferred to the insured
  • transferred to a partner of the insured (partnership)
  • transfer to corporation which insured is share holder
  • transfer due to divorce agreement
  • wanting to give to child, better in ILIT
37
Q

Pure Life Annuity

A
  • periodic payment for life
  • advantages:
    • guaranteed income stream
    • no value remains at death
    • highest payout
  • disadvantages:
    • receives fixed payment
    • cannot ask for principal back
    • annuitant may day before entire principal is realized
38
Q

Exclusion Ratio Calculation (Annuities)

A
  • monthly payment x life expectancy (in months) = expected return
  • (investment/expected return) = exclusion ratio
39
Q

Principle of Indemnity

A
  • insurer seeks to reimburse the insured for approximately the amount lost, no more and no less
40
Q

Insurable Risk

A
  • right or relationship with regard to the insured person or property such that the insured will suffer financial loss from damage, loss, or destruction to what is insured
41
Q

Subrogation

A
  • insurer takes over the legal rights of the insured that existed at time of loss
42
Q

Unilateral

A
  • only one party is bounded; insured makes no promise
43
Q

Adhesion

A
  • contract is accepted as is. Not negotiated
44
Q

Waiver of provisions

A
  • only president, vp, secretary may alter contract. Must be accepted as is
45
Q

Aleatory

A
  • number of dollars given up are unequal. Outcome is uncertain
46
Q

Capital Needs Approach Formula

A
  • annual income / (rate of return - inflation)
  • not real rate of return like TVM
47
Q

When is Life Insurance Policy in Force?

A
  • when policy is delivered and premium have been collected
48
Q

Property Coverage

A
  • is on valued basis
49
Q

Auto Insurance (Most Important for Wealthy)

A
  • Part A and Part C
50
Q

Auto Insurance (Most important for poor and unemployed)

A
  • part B and part D
  • likely can’t afford medical payments or car repairs
51
Q

Insured Changes

A
  • cannot complete 1035 exchange
52
Q

Nonforfeiture Options

A
  • surrender for cash value
  • reduce death benefit via paid up reduce amount
  • create term policy which terminates if out lived via extended term
53
Q

If loan is mentioned along with dividend options

A
  • choose one year/5th dividend option
54
Q

Life Settlements

A
  • typically over age 65
  • not made to terminally or chronically ill
  • look for LTCG answer
55
Q

MEC Characteristics

A
  • once a mec always a mec
  • all single premiums are mecs
  • distributed LIFO
  • if under 59.5 also a 10% penalty
  • if seven pay test is unmet and too much is paid in first 7 years
  • dividends are taxed as income if received in cash, reduced premiums due, or retained to pay policy loan
56
Q

Capital Retention Formula

A
  • yearly income/inflation + first years income
  • be sure to include first years income
57
Q

Medicare Eligibility commingled with COBRA

A
  • medicare is a 36 month event
58
Q

Increase Death Benefits Yearly

A
  • one year term
59
Q

Calculate Economic Benefit

A
  • take higher of actual cost and table 1
  • take different between step 1 and amount paid
  • multiply by 12 for annual
  • multiply by life insurance amount / $1,000
60
Q

Can group health be converted to individual health

A

Yes

KB CFP March 2024 (8 decks)

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