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Flashcards in Insurance Deck (36)
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1

Risk vs Peril vs Hazard

Risk: A condition where there is a possibility of loss (where exposure to loss exists)
- Starting a business or buying real estate for example

Peril: The cause of a possible loss, the event insured against perils like windstorm, fire, and theft

Hazard: A condition that may create or increase the chance of loss arising from a given peril like:
- Owning a home on an earthquake fault
- Owning a home by a river

2

Elements of Insurance

1) Large number of homogeneous exposure units
2) Loss must be definite and measurable
3) Must be fortuitous or accidental
4) Must NOT be catastrophic (for the insurance company)

3

Methods to Avoid/Reduce Risk

1) Avoidance: (do not dive, do not purchase property but rent it)
2) Diversification: duplication of assets or activities at different locations
3) Transference: INSURANCE
4) Retention: voluntary - recognizes the the risk exists and assumes losses (deductible, co-insurance)
5) Reduction: (sprinkler system, safety programs)

4

Insurable Interest

Property/Casualty: At inception and at time of claim

Life: At inception but doesn't need to be at time of claim

5

Parts of Insurance Contract (DDICE)

- Declarations Page: factual statements that identity specific person, property, or activity being insured
- Definitions: explanation of key policy terms
- Insurance Agreements: spells out the basic promise of the insurance company
- Conditions: spells out in detail the duties and rights of both parties
- Exclusions: circumstances when the insurer will not pay

6

Negligence

- Attractive Nuisance (swimming pool)
- Negligent per se (violate a statute)
- Strict Liability (product liability)
- Absolute Liability (workers comp)
- Vicarious Liability (principals responsible for their agents)

7

Defenses

- Assumption of Risk (skiing, stock car racing)
- Contributory (jay walking, being drunk)
- Comparative (A is 20% at fault, B is 80%)
- Last Clear Chance (road rage)

8

Insurance Rating/Category

- A.M. Best / A++ to F (preferred rating over SP)
- S&P/ AAA to CCC

9

Property excluded under personal property coverage

1) Animals
2) Motorized land vehicles and aircraft
3) Property of roomers, boarders, and tenants
4) Property contained in an apartment regularly rented or held for rental to others

10

Perils Coverage (Basic)

WHARVVES/FLT

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

11

Perils Coverage (Broad)

(Basic plus RAFF)

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

12

Homeowners Policy Exclusions

(FINE POWN)
- Earthquake
- Flood
- Neglect
- Intentional Loss
- Ordinance/Law
- Power Failure
- War
- Nuclear
- Sinkhole is a covered peril for the exam

13

Requirements for Vehicle to be eligible for ISO and PAP coverage

- be owned by an individual or spouse living in household
- be a private passenger automobile
- not be used as a public or livery conveyance
- not be rented to others

14

Persons Insured Under PAP Medical Payments Coverage

- named insured any any family members injured while in covered auto
- named insured any any family members injured while a pedestrian
- other persons while occupants of insured auto (passengers)

15

Umbrella Liability Insurance

- provides liability coverage for catastrophic legal claims
- required policy owner too carry certain underlying coverage of specific minimum amounts
- professional acts are specifically excluded
- nearly always the right answer***
- covers amount after insurance pays

16

Professional Liability

Malpractice: bodily injury (doctors)

EandO: money damages (advisers, lawyers, accountants, insurance agents)

17

Workers Compensation

- unlimited medical expenses
- disability income
- death benefits
- rehab
- absolute liability
- Benefits are received tax free
- NOT sick pay

18

HMO vs PPO

HMO:
- provider paid monthly fee regardless of services rendered (capitation)
- out of network care not covered at all

PPO:
- provider paid for actual serviced rendered
- out of network care partially covered (usually 70%)

19

Definitions of Disability

1) Own Occupation: best case (your exact job)
2) Modified Any Occupation
3) Split Definition - own then modified
4) Any Occupation (ss definition)
5) Loss of Income

20

Disability Income: Policy Continuation Provisions

Noncancellable (noncan): continuous term policy guaranteeing the insureds right to maintain the policy at the stated premium. Better.

Guarenteed Renewable: continuous right to maintain the policy, but the insurer may increase the premiums by class of insureds.

21

Proceeds Taxable due to Transfer of Value

If interest of LI policy is transferred for valuable consideration, proceeds over the consideration paid into policy, combined with premiums, are taxed as ordinary income. (3 year rule does not apply)

- Exceptions: sale or transfer to the insured, sale or transfer to a partner, corporation in which the insured is a shareholder/officer, divorce

22

1035 Tax Free Exchange Rules

Life --> Life (ok)
Life--> Annuity (ok)
Annuity --> Annuity (ok)
Annuity --> Life (NO NO NO)

*cannot be done if insured changes*

23

Annuity Taxation

periodic payouts basis/payout=tax free

Lump Sum Payouts:
LIFO
Ordinary Income plus 10% penalty if under 59.5

24

Fringe Benefits Tax-Free (major ones)

- Health Care Premiums
- Insurance premiums on non-discriminatory group life up to $50k
- company car for working conditions only
- employer provided transit passes or parking passes ($265/mo max)
- Occasional overtime meal money, cab fair
- Discounts on services limited to 20% of selling price charged to customers

25

Fringe Benefits Taxable

Heath insurance premiums paid for self-employed, partners, and more than 2% owners of S Corp are taxable income. 100% is deductible as an adjustment to income on front of 1040. This includes all types of heath insurance programs.

26

Insurance Contract Characteristics/Principals

Unilateral: only one party is bound; insured makes no promise

Adhesion: contract is accepted as is (not negotiated)

Waiver: only the president and top execs can alter the contact

Aleatory: number of dollars given up is unequal

27

Life Insurance Provisions

1) Incontestable: 2 years and validity secure

2) Suicide: if within 2 years, DB will be premiums paid

3) Grace Period: number of days after no pay

4) APL: (whole life) company uses CV for payment

5) Reinstatement: policy can come back after deafult

6) Conversion: easy way to do term to whole

28

NAIC

Agency that:
- oversees state accreditation programs
- promotes laws and regulation uniformity
- transmits info to regulators
- protects interest of policy owners

*Does not enact legislation*

29

VEBA

Employers establish to fund certain benefits for members like Death benefit, medical expense, child care, severance, education, disability, legal, unemployment (NO DC or retirement)

*contributions (within limits) are deductible for the employer except for deferred comp arrangements and other retirement benefits*

30

Life Insurance Surrendered Gain above Basis is taxed...

as ordinary income