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CFP - Brian's Cards > Insurance > Flashcards

Insurance Flashcards

(104 cards)

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1
Q

What is a RISK

A

A condition with a possibility of loss or a situation with an exposure to loss.

Examples of risks include the following:
* Exposure to germs or viruses
* Starting a business
* Activity that may result in injury
* Owning real estate
* Losing a job
* Becoming a CFP® licensee (liability)

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2
Q

What is a PERIL

A

Is the cause of a loss. Insurance can cover economic loss from certain perils.

Examples of perils include the following:
* Fire
* Windstorm
* Liability
* Collision
* Theft
* Sickness or injury

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3
Q

What is a HAZARD

A

A condition that may create or increase the chance of loss arising from a given peril and may
also increase frequency or severity of the loss.

Examples of hazards include the following:
* Building on an earthquake fault
* Poor maintenance of a car’s brakes
* Not disposing of a Christmas tree
* Working in a contagious disease lab

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4
Q

What is the “Law of large numbers”

A

As the number of independent events increases, the likelihood grows that the actual results will be close to the expected results.

For this to work, the insurer needs a large number of similar (homogeneous)
exposure units.

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5
Q

What is Adverse Selection

A

There should be the same proportion of good and bad risks in the group insured as there were in the one from which the statistics were taken.

The tendency of the poorer-than-average risks to seek insurance to
a greater extent than the average or better-than-average risks must be reduced (adverse selection)

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6
Q

“Insurable Risk”
For an insurance company to assume a risk, the risk must have all the following characteristics:

A
  • must be a sufficiently large number of homogeneous exposure units to make losses reasonably predictable
  • must be definite and measurable
  • must be fortuitous or accidental
  • must not be catastrophic to the insurance company
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7
Q

What are things you can do to control “RISK”

A
  • Avoidance of risk (rent vs own)
  • Diversification of risk (use multiple locations)
  • Reduction of risk (smoke detectors)
  • Retention of risk (deductibles/coinsurance)
  • Transfer of risk (insurance)
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8
Q

What is more important coverage against severity or probability

A

Severity!

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9
Q

For risks that involve high loss severity and low loss frequency, the most suitable technique is:

A

Risk transfer (insurance)

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10
Q

For risks that involve high loss severity and high loss frequency, the most suitable technique is:

A

Avoidance

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11
Q

For risks that involve low loss severity and high loss frequency, the most suitable techniques are:

A

Retention and reduction (bikes stolen on college campus)

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12
Q

For risks that involve low loss severity and low loss frequency, the most suitable technique is:

A

Retention

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13
Q

What is Principle of Indemnity

A

“No more…No less” Made WHOLE

A principle underlying insurance contracts (other than life insurance) under which the insurer seeks to
reimburse the insured for approximately the amount lost, no more and no less.

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14
Q

What is “Insurable Interest”

A

Insurable interest must operate at the issuance of an insurance policy and at the time of loss in property and casualty insurance.

With life insurance, insurable interest must operate at the time of issue but does not need to be present at the time of death.

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15
Q

What elements must apply for a contract to be legally enforceable

A
  • There must be an agreement preceded by offer and an acceptance by the one to whom the offer is made (the application).
  • There must be consideration (generally money).
  • The principal must have legal capacity to execute contracts.
    1) Incompetent or intoxicated adults have limited or no capacity to execute contracts.
    2) Minors may have capacity to contract for necessities only. (Adult must sign as owner.)
  • The contract must be for a lawful purpose (unlawful - kill someone for benefits).
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16
Q

What is a Aleatory Contract

A

One party pays more than the other

With insurance, the amount of dollars spent by the contract parties is typically unequal. Insurance is an aleatory contract because as an insured may pay large premiums and receive no proceeds from the policy. Conversely, an insured may pay only a small premium and receive a large benefit from the
insurer.

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17
Q

What can an owner of an insurance policy do

A
  1. Can transfer (assign) the policy to someone else
  2. Receive the cash values or dividends
  3. Borrow against the cash values
  4. Change the beneficiary
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18
Q

Examples of Personal Risk

A
  • Death
  • Disability
  • Poor health
  • Unemployment
  • Superannuation (the risk of outliving an individual or couple’s money)
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19
Q

Examples of Property Risk

A
  • Real
  • Personal
  • Auto
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20
Q

What are actions that create Liability

A
  • Negligence
  • Intentional torts
  • Strict liability
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21
Q

What is an “Attractive Nuisance” (Miley Cyrus)

A

Unfenced Pool
Vacant Lot
Land with access to River/lake

A situation in which a high degree of care is imposed on the land occupier for
certain conditions on the land.

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22
Q

What is “Strict Liability”

A

Product Liability

Generally limited to manufacturers and distributors of products found to be defective.

Examples include romaine lettuce with e. coli bacteria, cars found to have defects, pharmaceuticals that
cause illness or death.

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23
Q

What is “Absolute Liability”

A

An extra hazardous condition which results in losses to others.

Examples include keeping of wild animals, and blasting.

Note that workers’ compensation also falls under absolute liability.

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24
Q

What is “Assumption of Risk”

A

If one party recognizes and understands danger in an activity yet voluntarily chooses to encounter it, another party cannot be held responsible for the injury.

Skiing/Sky Diving

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25
What is "Contributory Negligence"
Any negligence on the part of the injured party, although slight, defeats the claim. Examples include jaywalking and driving while drunk.
26
What is "Last Clear Chance"
Any contributory negligence of the injured party will not bar recovery of damages if the other party, immediately prior to the accident, had a last clear chance to prevent the accident but failed to do so. For example, road rage.
27
What is "Capital Utilization"
“Use it all” Leaves NO money at the end The first method of determining life insurance needs is capital utilization which factors annuitization to fund future income needed but leaves no money at the end of the anticipated distribution period (calculate the present value of a future need).
28
What is "Capital retention or Capital preservation"
Presumes that only interest is distributed. The original capital is still left at the end of the income period.
29
What does Disability Income Insurance typically pay
only about 50-60% of earned income This may be improved by adding group disability coverage after the individual policy has been issued.
30
What is a character of Participating Polices
A participating policy pays annual dividend to the policyholder. A participating policy charges larger premium (willful overcharge).
31
What are the ratings for A.M. Best and Standard & Poor's
A.M. Best A++ to F Standard & Poor’s AAA to CCC
32
What are the five sources for underwriting a policy
The underwriter uses five sources of information: * An application for insurance * Information from the agent or broker * Investigations * Information bureaus * Physical examinations or inspections
33
What does Part A of a Homeowners Policy Cover
Dwelling (abode)
34
What does Part B of a Homeowners Policy Cover
Other structures - detached (backyard)
35
What does Part C of a Homeowners Policy Cover
Personal property (contents)
36
What does Part D of a Homeowners Policy Cover
Loss of use (Day's Inn)
37
What does Part E of a Homeowners Policy Cover
Personal liability (everyone wants to sue...enemies)
38
What does Part F of a Homeowners Policy Cover
Medical Payments (first aid)
39
Basic Perils - WHARVES/FLT
Windstorm, Hail, Aircraft, Riot, Vandalism, Vehicles, Explosion, Smoke, Fire, Lightning, and Theft
40
Broad Perils - RAF
Rupture of a system Artificially generated electricity Falling objects Freezing of plumbing *Remember Royal Air Force or FAR
41
Open Perils
The insurer agrees to pay for damage by any peril except those specifically excluded. Open perils coverage is generally the appropriate choice for the CFP® exam because it covers unusual risks that are not named under the Basic and Broad forms.
42
What does HO-1 cover
Dwelling - Basic
43
What does HO-2 cover
Home - Broad
44
What does HO-3 cover
Home - Open
45
What does HO-5 cover
Home - Open The only difference from HO-3 is that the contents are also covered under open form.
46
What does HO-4 cover
Renters
47
What does HO-6 cover
Condos
48
What are normal "Exclusions" on a home policy
OPEN WIF Eight general exclusions that apply to all of the homeowner forms: Ordinance of law War Power failure Intentional loss Earth movement (Earthquake) Flood Neglect Nuclear hazard Also, sinkhole is covered if it affects the stability of the house.
49
What is a "floater" or Scheduled personal property endorsement
Clients should cover valuable property like jewelry, golfer’s equipment, stamps, coins, etc., by adding a scheduled personal property floater to their basic HO policy
50
Replacement cost coverage versus Actual Cash Value (ACV)
When losses are settled on a replacement cost basis, no deduction in benefits is made for depreciation. Under ACV, losses are settled under replacement cost less depreciation. The original cost is immaterial in the calculation of ACV. Double breasted suits example
51
How do you do a Property Loss Calculation
Replacement cost x Coinsurance Percentage = Insurance Required (Insurance carried / Insurance required x loss) - deductible = Amount paid by insurance
52
What does PAP stand for
Personal Auto Policy
53
What is Part A on PAP
Liability (all my fault)
54
What is Part B on PAP
Medical Payments (bed in a hospital)
55
What is Part C on PAP
Uninsured motorist (careless)
56
What is Part D on PAP
Damage to your auto 1) Collision 2.) Comprehensive or Other then collision
57
Workers' Compensation is what type of liability
Absolute liability
58
What are benefits under workers’ compensation
* Medical expenses without limit on time or money, including occupational disease benefits. They are not subject to any deductibles or coinsurance. * Disability income with very short waiting periods (days). Benefits are for both total and partial disabilities. Benefits are a percentage (usually 66 2/3 %) of the employee’s average weekly pay subject to maximum and minimum amounts. * Death benefits are payable to family members. * Rehabilitation benefits include medical rehabilitation as well as vocational rehabilitation.
59
For health Insurance once the "Stop-loss limit" is reached what happens
The insurance company pays 100% of the expenses
60
What is Medicare Part A
Hospital Insurance Eligibility - All persons age 65 and over who are entitled to monthly Social Security cash benefits or monthly benefits under Railroad Retirement programs are eligible for benefits Limitation - Generally, services outside the U.S. are not covered.
61
What is Medicare Part B
Medical Insurance Part B is voluntary
62
What is Medicare Part D
Drug
63
What is a HMO
Health maintenance organizations Capitation: A monthly fee is paid to the provider. In return, the individual receives virtually all the medical care required during the year. Gatekeeper: Care is managed by a primary care physician who is responsible for determining what care is provided and when the individual should be referred to specialists.
64
What is a PPO
Preferred provider organizations PPOs represent a group of healthcare providers contracting with insurance companies, third party administrators, or others to provide medical care services at a reduced fee. PPOs differ from HMOs in two major respects: * Health care providers in the PPO are generally paid on a fee-for-service basis as needed. * Employees are not required to use practitioners or facilities of the PPO. They can go outside of the network, but benefits are generally reduced relative to benefits paid for network provided care. For this reason, deductibles will be higher.
65
Who receives 18 months of COBRA
Job Related Voluntary or involuntary termination; change from full-time to part-time
66
Who receives 36 months
Non-job Related Employee’s death, divorce, legal separation or eligibility for Medicare Loss of dependent status
67
What is a HSA
Health saving accounts HSAs are savings accounts that operate alongside a High Deductible Health Plan (HDHP)
68
What is a HDHP
High Deductible Health Plan
69
Who can make contributions to a HSA
The Individual or the Employer
70
What is a HRA
Health Reimbursement Arrangements An HRA is an arrangement that is solely employer-funded and reimburses employees for substantiated medical expenses up to a maximum dollar amount per coverage period. For example, an HRA can reimburse for out-of-pocket costs of an HDHP (High Deductible Health Plan).
71
What it comes to Disability Insurance the best definition of total disability for the benefits is
own occupation Which is defined as the inability of the insured to engage in his or her own occupation.
72
What is "modified any-occupation" when it comes to Disability Insurance
The insured is unable to engage in any occupation for which he/she is qualified by reason of training, education, or experience.
73
What is the difference between "Noncancelable" and "Guaranteed renewable" when it comes to Disability Insurance
Noncancelable guarantees that the individual can keep the policy in force by paying the stated premium and that the premium will not increase Guaranteed renewable guarantees that the individual can keep the policy in force by paying the premium, **but** the premium may be increased
74
What does Benefit Period mean
How long will the policy pay
75
What does Elimination/waiting period mean
The elimination period (used interchangeably with the term waiting period) acts like a deductible. The longer the waiting period, the lower the premium.
76
What is Presumptive disability
Provides that total disability benefits will be paid if the insured loses sight, hearing, speech, both hands, both feet, or one hand and one foot.
77
What does an Individual Disability Income Insurance Policy normally pay
Typically 50-60% of your earnings. If you want more, buy your individual policy first and then layer your group policy on top of that.
78
How is Disability Insurance taxed
If the **employee owns** the contract and **pays** the premium, benefits are tax-free to the employee. Premiums are not deductible If the **employee owns** the contract and the **employer pays** the entire premium under a bonus arrangement (Section 162 disability insurance), benefits are tax-free to the employee because the premium cost is included in the employer’s Form W-2. Premiums are deductible by the employer as a bonus to an employee If the **employee owns** the contract and the **employer pays** the entire premium under a salary continuation plan (Group Plan), benefits are taxable to the employee and premiums are deductible by the employer.
79
Owner of an S-Corp
Yell "Tax-free Benefits"
80
What are the Six activities of daily living (ADLs)
1. Eating 2. Bathing 3. Dressing 4. Transferring from a bed to chair 5. Using the toilet 6. Maintaining continence.
81
Does Medicare pay for Long Term Care
KINDA OF - must be Skilled Nursing (max of 20 days...then 21-100 days co-payment required...after 100 the patient must pay all) To qualify for skilled nursing benefits under Medicare Part A (Hospital Insurance), the patient must meet all the following conditions: * The patient’s condition requires skilled nursing. * The patient has been in a hospital at least three days in a row before admission to a participating skilled nursing facility. * The patient is admitted to the skilled nursing facility within a short time (generally within 30 days) after leaving the hospital. * The patient’s care in the skilled nursing facility is for a condition that was treated in the hospital. * A medical professional certifies that the patient needs and receives skilled nursing care.
82
You must have less than $________ to qualify for Medicaid
$2,000 in countable assets
83
What type of Life Insurance should a Low Risk Tolerance Investor purchase
Whole Life (CFP Board loves this) - not flexible and pays dividend - "if you see guaranteed death benefit it smells like Whole Life to me" Universal Life (both premiums and level of protection can be adjusted) - flexible
84
What is Whole Life
Lifetime payments Fixed and guaranteed death benefits
85
What is Universal Life
Premiums and the level of protection can be adjusted up or down.
86
What is Variable Life
Premium is fixed Cash Value is tied to performance of sub accounts
87
What is Variable Universal Life
Premiums and the level of protection can be adjusted up or down
88
What is a Second-to-die/Survivorship Life Policy
This is a contract that insures two lives with the promise to pay only at the second death.
89
What is APL and what does it do
Automatic premium loan If APL is elected and if the policyholder (for whole life policies) doesn’t pay the premium during the grace period, the company will automatically pay the premium and charge it against the cash value of the policy (and the death benefit).
90
91
When it comes to dividends from a life insurance policy what are your options (CRAPO)
Cash Reduce premiums due Accumulate with interest Paid-up additions One-year term/5th dividend
92
What are your nonforfeiture options when if comes to life insurance "Can't Even Pay"
Cash Extended term Reduced paid-up insurance
93
What are your settlement options when if comes to life insurance
Cash Interest Only Fixed Period (up to 30 years) Fixed Installment (fixed amount)
94
What is a viatical settlement
For the terminally ill (then than 2 years to live) Viatical settlements entail the sale of the policy for less than full face value. Such sales typically occur when the insured is terminally or chronically ill.
95
Is a viatical settlement taxable to the insured
No...It is not taxable to the dying insured
96
Is a viatical settlement taxable to the Viatical Company
Yes..."Trans for Value" Taxed on whatever is above their basis as Ordinary Income
97
What is a Life Settlement
Not terminally ill...just old! A life settlement is usually a transaction involving an insured who is not terminally or chronically ill and is generally over age 65.
98
How is a Life Settlement taxed
* Tax-free basis on the premiums paid * Ordinary income on the gains (cash value) * Long-term capital gains on the "offer" or "bonus" from the settlement company (think L...Life settlement...Long term gain)
99
In a MEC is the Death Benefit tax free
YES!!
100
What is the "problem" with a MEC (taxes)
The distribution above its basis is going to be taxable. Loans are also taxable!
101
Once a MEC
Always a MEC
102
What are the four exception for "Transfer of Value" (ICPD - "I see Dead People)
Transfer to the: *Insured *Corporation -in which the insured is a shareholder *Divorce agreement *Partnership - or business partner
103
What is the 1035 Exchange "two ladders"
Life is on top of both ladders...Annuity is under So you can go: Life to Life Annuity to Annuity Life to Annuity You can't jump from Annuity to life
104

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