Insurance

Question 1

Elements of an insurable risk

Answer 1

1. there must be a sufficiently large number of homogeneous exposure units to make losses reasonably predictable
2. the loss produced by the risk must be definite and measurable
3. the loss must be fortuitous or accidental
4. the loss must not be catastrophic to the insurance company

Question 2

what type of company is most likely to use stop loss coverage to partially self insure its employee medical insurance program?

Answer 2

companies with as few as 100 employees

Question 3

risk avoidance

Answer 3

a form of risk control
Examples:
-instead of purchasing property, rent it
-avoid buying a house with a swimming pool

Question 4

Risk retention

Answer 4

a form of risk financing
examples:
-deductibles in insurance policies
-coinsurance in insurance policies
-self insurance

Question 5

Risk reduction

Answer 5

a form of risk control
example:
-install sprinklers, smoke detectors, and burglar alarm
- create safety programs for businesses

Question 6

risk diversification

Answer 6

a form of risk control
examples:
-store assets at different location(s)

Question 7

risk transfer

Answer 7

a form of risk financing
example:
-insurance
-hold harmless agreements/hedging contracts
-incorporation of your business

Question 8

“The insuring agreement”

Answer 8

the legally binding arrangement that explains the basic promise of the insurance company

Question 9

“The declarations”

Answer 9

the factual statements identifying the specific person, property, or activity being insured

Question 10

capital retention calculation

Answer 10

aka capital preservation
presumes that only interest is distributed
the original capital is still left at the end of the income period

Question 11

vicarious liability

Answer 11

when one person is held liable for the negligent behavior of another person.
Example: a branch manager at the broker-dealer who is responsible for the representatives, and a manager at an insurance agency who is responsible for the agents

Question 12

“Respondeat superior”

Answer 12

also known as vicarious liability

Question 13

equation for coinsurance/required insurance in claims

Answer 13

Replacement cost x coinsurance = insurance required

insurance carried
[————————- x loss] - deductible
insurance required

Question 14

HO2

Answer 14

broad form of all coverages

Question 15

HO3

Answer 15

open perils for coverages A, B, and D
Broad for personal property

Question 16

HO4

Answer 16

renters policy
broad form

Question 17

HO6

Answer 17

condo policy

Question 18

Errors and ommissions insurance

Question 19

break point (in medical insurance)

Answer 19

the insurer begins to pay 100% of all medical expenses

Question 20

COBRA time periods!

Answer 20

18 months for voluntary or involuntary termination, change from full to part time
36 months for EE death, divorce, legal separation or eligibility for medicare
36 months for loss of dependent status

Question 21

COBRA election period

Answer 21

60 days after the actual notice of the event to the qualified beneficiary by the plan administrator

Question 22

high loss severity and low loss frequency

Answer 22

risk transfer (insurance)

Question 23

high loss severity and high loss freqeuncy

Answer 23

avoidance
why? insurance premiums would be prohibitive

Question 24

low loss severity and high loss frequency

Answer 24

retention and reduction
why? high frequency implies that transfer will be costly

Question 25

low loss severity and low loss frequnecy

Answer 25

retention why? these losses rarely occur

Question 26

indemnity

Answer 26

insurer seeks to reimburse the insured for approximately the amount lost, no more or less

Question 27

four principles supporting indemnity

Answer 27

1. insurable interest 2. the concept of actual cash value 3. other insurance 4. subrogation

Question 28

what's important to know about adhesion

Answer 28

because insurance policies are generally contracts of adhesion, in the event of ambiguity, the courts are likely to rule in favor of the insured and against the insurer

Question 29

rescission

Answer 29

contract is deemed null from its beginning due to fraud, misrepresentation, concealment, or mutual mistake of material fact

Question 30

tort

Answer 30

wrongful act other than a breach of contract for which a civil action may be brought against the tortfeasor

Question 31

capital utilization

Answer 31

leaves NO money at the end of the distribution period

Question 32

capital retention (aka capital preservation)

Answer 32

presumes only interest is distributed original capital remains

Question 33

typical per diem for LTC

Answer 33

$204 - $400+

Question 34

Companies that rate insurance companies

Answer 34

AM Best - A++ to F Standard & Poor's - AAA to CCC Moody's - Aaa to C Weiss - A+ to F

Question 35

how do you choose an insurance company based on rating?

Answer 35

should choose a company that holds one of the three highest ratings from at least three of the rating services

Question 36

HO2 vs HO3

Answer 36

broad form for all coverages HO3 is open perils for A, B, and D HO3 is much more comprehensive

Question 37

HO3 vs HO5

Answer 37

the only difference is that the contents are also covered under open form

Question 38

HO4

Answer 38

renters no "dwelling" coverage (A and B)

Question 39

HO6

Answer 39

normally association covers the structure Coverage A and C can both be changed by endorsement to apply on an open perils basis (best answer for the exam)

Question 40

insurance and newly acquired auto

Answer 40

if a new auto replaces an existing vehicle, automatically insured for parts a, b, and c there is no automatic coverage unless the insurance company is notified within 14 days of acquisition

Question 41

if a spouse ceases to be a resident of the same household, he or she is still covered until the earliest of the following:

Answer 41

-the end of 90 days following the spouse's change of residency -the effective date for the spouse's own new policy -the end of the policy period

Question 42

personal property floater

Answer 42

designed primarily to provide "open perils" coverage for unscheduled personal property on a worldwide basis the coverage is for property that "floats" like cameras, jewelry, sporting equipment, etc

Question 43

workers comp reflects what type of liability?

Answer 43

absolute liability

Question 44

taxation of workers comp

Answer 44

benefits are received income tax free employer may deduct the premium cost

Question 45

unemployment insurance

Answer 45

determined by previous earnings payable up to 26 weeks included in gross income

Question 46

medicare part a benefits

Answer 46

hospital stays are subject to deductible for the first 60 days second deductible for the next 30 days third deductible for the next 60 days inpatient hospital care is limited to 150 days

Question 47

medicare part b

Answer 47

medicare pays 80% no stop loss

Question 48

penalties for non medical HSA withdrawal

Answer 48

20% (under age 65)

Question 49

noncancelable

Answer 49

individual can keep the policy in force, paying the stated premium premium will NOT increase

Question 50

guaranteed renewable

Answer 50

can keep the policy premiums can increase on a class basis

Question 51

long term care eligibility

Answer 51

the individual is expected to be unable to perform, without substantial assistance from another person, at least two activities of daily living for at least 90 days

Question 52

deductibility of LTC premiums

Answer 52

deductible limit increases with age subject to 7.5% AGI floor

Question 53

length of medicaid lookback

Answer 53

5 years

Question 54

annual renewable term (ART)

Answer 54

policy provides protection for one year only permits the insured to renew the policy for successive periods of one year at a higher premium each year without having to furnish evidence of insurability

Question 55

decreasing term

Answer 55

level premium but the death benefit decreases over time

Question 56

joint life insurance

Answer 56

written on the lives of two or more persons and payable upon the death of the first person to die

Question 57

endowments

Answer 57

if on the test, these are not the answer

Question 58

Cash option (dividend)

Answer 58

paid in cash (generally not taxable)

Question 59

reduction of premiums (dividend option)

Answer 59

insurance company subtracts the amount of the dividend from the premium due and sends a premium notice for the remainder

Question 60

accumulated with interest (dividend option)

Answer 60

dividends remain with the insurance company in an internet bearing account. interest paid on the dividends is taxable dividends are added to the death proceeds or, it the policy is surrendered, to the cash value

Question 61

purchase paid up additions

Answer 61

each dividend is used to purcause a small amount of additional, fully paid up whole life insurance

Question 62

chronically ill

Answer 62

must meet one of the following: 1. unable to perform at least two activities of daily living 2. a certain level of disability 3. requires supervision for protection due to severe cognitive impairment

Question 63

life settlement

Answer 63

NOT terminally ill generally over 65 taxed as follows: 1. tax free basis (premium paid) 2. ordinary income from the basis to the policy's cash surrender value 3. long term capital gains from the higher of either the cash surrender value (or the federal income tax basis) to the net settlement proceeds

Question 64

taxation of whole life insurance

Answer 64

cash value above cost basis at the time of surrender is taxed as ordinary income

Question 65

withdrawals and loans (life insurance)

Answer 65

do not count as taxable income unless the policy is surrendered or lapses and the amount owed exceeds what was paid in in that case the loan becomes a taxable event

Question 66

USDA

Answer 66

Uniform Simultaneous Death Act any persons who die within 120 hours of each other, predecease each other

Question 67

why is the designation of MECs important

Answer 67

MECs are modified endowment contracts taxed like annuities

Question 68

a single premium policy issued after 1988

Answer 68

ALWAYS a MEC on the exam

Question 69

benefits of a buy sell agreement

Answer 69

- guarantees a market for the business interest -provides liquidity for the payment of death taxes and other estate settlement costs of the deceased owner -helps establish the estate tax value of the decedent's business interest -enables the business to continue in the hands of the remaining owners -makes a business a better credit risk

Question 70

taxation of key employee life insurance

Answer 70

business should be the owner and bene premiums are nondeductible while the death benefits are tax free

Question 71

endorsement method of "split dollar plan"

Answer 71

ER owns the policy ER pays premium EEs bene gets balance of death benefit

Question 72

endorsement method "collateral assignment method"

Answer 72

EE is the owner EE is shareholder EE assigns the policy At death or policy surrender ER receives premium paid

Question 73

assumption of annuities for the exam

Answer 73

generally, annuities are annuitized

Question 74

pure life annuity

Answer 74

DB for as long as the annuitant lives payments cease upon their death advantages -guaranteed stream of income -no value remains to be subject to estate taxes -highest payout disadvantages -no inflation hedge -cannot "commute" the remaining value -if death before return of principal, nothing is left for benes

Question 75

suitability of variable annuities

Answer 75

suitable for clients with moderate to high risk tolerance if a question asks about "attempts to cope with inflation" or "keep up with market conditions" - variable products are generally the right choice

Question 76

taxation of investment income earned on annuities during the accumulation perido

Answer 76

generally not taxable until distributed to the contract holder

Question 77

taxation of annuity withdrawals

Answer 77

issued after 8/13/1982 = LIFO withdrawal is taxable interest to the extent that the cash surrender value of the contract exceeds the investment IN ADDITION - withdrawals by contract owners prior to age 59 1/2 are subject to a 10% premature withdrawal penalty on the ordinary income tax

Question 78

4 conditions that must be met by group life insurance

Answer 78

1. must provide a general DB which is excludable from gross income 2. must be provided to a group of EEs as comp 3. policy must be carried directly or indirectly by the ER 4. amount of insurance provided to each EE must be computed under a formula that precludes individual selection of death benefits

Question 79

group term dependent coverage

Answer 79

NOT included in the $50k exemption $2k limit anything above that pays tax on the premium

Question 80

premium paid by ER on group EE life

Answer 80

deductible by the employer

Question 81

conversion of group life insurance

Answer 81

any EE whose group life insurance coverage ceases has the right to convert to an individual life insurance policy conversion can be made to any type of PERMANENT plan premium will reflect the insured's age at the conversion

Question 82

section 125 cafeteria plans

Answer 82

must include a "cash option" Note: a 401(k) arrangement can be offered under a cafeteria plan

Question 83

FSA "use it or lose it" note

Answer 83

employers may offer either a grace period or a rolling balance, but not both

Question 84

max tax free reimbursement under a dependent care FSA

Answer 84

$5k/year BOTH spouses must earn income in order for the dependent care FSA to be available

Question 85

common expenses NOT reimbursable by DCFSA

Answer 85

tuition and fees expenses for children age 13 and older late payment fees overnight camp field trips, clothing and food transportation to and from the dependent care provider

Question 86

APL

Answer 86

automatic premium loan

Question 87

the possible hiccup with cash surrender in life insurance

Answer 87

there COULD be a 6 month delay to prevent a run on the bank standard provision

Question 88

nonforfeiture options

Answer 88

cash reduced paid up insurance extended term

Question 89

dividend options

Answer 89

cash reduced premium due accumulate with interest paid up additions one year term/5th dividend

Question 90

settlement options

Answer 90

cash interest only fixed period fixed installment 4 life income options