Insurance Planning Flashcards
(50 cards)
1
Q
Basic Insurance Concepts Risk
A
A condition where there is a possibility of loss (a situation where an exposure to loss exists) -
- Starting a Business
- Buying real estate
2
Q
Basic Insurance Concepts Peril
A
The cause of a possible loss, the event insured against perils like windstorm, fire, and theft.
3
Q
Basic Insurance Concepts Hazard
A
A condition that may create or increase the chance of loss arising from a given peril like: -
- Owning a home on an earthquake fault line
- Owning a home by a river
4
Q
Elements of Insurance
A
- Large number of homogeneous exposure units
- Loss must be definite and measurable
- Must be fortuitous or accidental
- Must NOT be catastrophic (for the insurance company)
5
Q
Methods to Avoid/Reduce Loss
A
Methods Are:
- Avoidance: (do not drive, do not purchase property but rent it)
- Diversification: duplication of assets or activities at different locations.
- Transference: INSURANCE
- Retention: voluntary - recognizes that the risk exists and assumes losses (deductible, co-insurance)
- Risk reduction: (sprinkler system, safety programs)
6
Q
Insurable Interests
A
Property/Casualty: At inception and at time of claim
Life: At inception but need not be at time of claim
7
Q
Parts of Insurance Contract
A
Declarations Page: Factual statements that identify the specific person, property or activity being insured
Definitions: explanation of key policy terms
Insuring agreements: Spells out 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
8
Q
Negligences
A
- Attractive nuisances (swimming pool / vacant lot)
- Negligence per se (violate a statute)
- Strict liability (product liability)
- Absolute liability (workers compensation)
- Vicarious liability - respondent superior (principals responsible for their agents)
9
Q
Defense
A
- Assumption of risk (skiing, stock car races)
- Contributory (jay walking, being drunk)
- Comparative (A is 20% negligent, B is 80%)
- Last clear chance (road rage)
10
Q
Calculating Life Insurance Needs
(two methods)
A
- Capital utilization approach: uses annuitization to provide needed income but leaves no money at the end of planned period
- Capital needs approach: uses interest only, so the original capital is still left at the end of income period (also called capital retention or interest only)
11
Q
Insurance Rating Service / Category
(most comprehensive service)
A
- A.M. Best / A++ to F
- Standard & Poor / AAA to CCC
12
Q
Sections of Homeowners Policy
A
Section I (Coverage: A B C D)
A - dwelling and attached structures
B - structures separated from dwelling (detached garage, fences)
C - contents and personal property
D - loss of use
Section II (Coverage: E F)
E - liability
F - medical payments
13
Q
Property Excluded Under
Personal Property Coverage
A
- Animals, birds and fish
- Motorized land vehicles and aircraft
- Property of roomers, boarders and other tenants
- Property contained in an apartment regularly rented or held for rental to others by the insured (unless specifically endorsed)
14
Q
Perils Covered
(Basic Form)
A
The policy lists the perils covered
(WHARVES/FLT)
_W_indstorm, _H_ail, _A_ircraft, _R_iot, _V_andalism, _V_ehicles, _E_xplosion, _S_moke, _F_ire, _L_ightening, _T_heft
15
Q
Perils Covered
(Broad Form)
A
The policy lists the perils covered
(Basic plus RAF)
_R_upture of a system, _A_rtificially generated electricity, _F_alling objects, _F_reezing of plumbing
16
Q
Homeowner’s Forms of Coverage
A
17
Q
Homeowner Polciy Exclusions
A
- Earthquake
- Flood
- Neglect
- Intentional Loss
- Ordinance/Law
- Power Failure
- War
- Nuclear Hazard
- Sink hole is a covered peril for the exam.
18
Q
Replacement Cost Coverage
A
Replacement cost x Coinsurance percetage = Insurance required
(Insurance Carried)/(Insuracne required) × Loss -Deductible = Amount Paid by Insurance
19
Q
Automobile Risk Exposures
Requirements for a vehicle to be eligable for:
Insurance Services Office (ISO)
Personal Auto Policy (PAP)
A
- Be owneed by an individual or by a husband and wife living in the same household
- Be aprivate passenger automobile
- Not be used as a public or livery conveyance
- Not be rented to others
20
Q
Auto Insurance Policy Parts
A
- Part A - limited to third parties
- Part B - medical payments
- Part C - uninsured / underinsured motorist
- Part D - damage to the covered auto
21
Q
“Covered Auto” as used
under the policy
A
- Any vehicle shown on the declarations page
- Any of following vehicles which you acquire during the policy period: private passenger auto, pickup truck, panel truck or van
- No coverage for a pickup, panel truck, or van used in a business (need comercial policy)
- Any tailer you own listed on the declarations page
- Any auto or trailer you do not own while used as a temporary substitute for any vehice described in this definition which is out of normal use because of a breakdown, repair, servicing, loss or destruction
22
Q
Persons insured under the medical
payments coverage of the PAP
A
- The named insured and any family member who suffers bodily injury caused by accident while occupying the covered auto
- The named insured and family members who if while a pedestrian, are struck by any motor vehicle designed for use on public roads, or by a trailer.
- Other persons while occupant of the insured’s auto (passengers)
23
Q
Uninsured Motorist Coverage
(UM)
A
This agreement promises to pay for amount an injured insured could have collected from the unisured driver if such a driver had carried auto liabilty insurance. The term “covered person” as used under the uninsured motorist coverage of the Personal Auto Policy includes the following.
- The named insured and any family member
- Any othe rperson occupying the insured’s covered auto
- Any person, for damages that person is entitled to recover because of injury to a person decribed above
24
Q
Perils Covered Under the
“Other Than Collision”
Provision of the Auto Policy
A
- Breakage of glass
- Loss caused by
- Falling Objects
- Fire
- Theft
- Explosion
- Earthquake
- Windstorm
- Hail
- Water
- Flood
- Riot or civil commotion
- Contact with birds or animals
25
**Umbrella Liability Insurance**
* Nearly always correct answer, since it is smart coverage
* Provides liability coverage (BI/PD) for catastrophic legal claims
* Requires policy owner to carry certain underlying coverage of specific minimum amounts
* Professional acts are specifically EXCLUDED
26
**Professional Liability**
**Malpractice:** bodily injury (doctors, dentists)
**Errors and Omissions (E&O):** Monetary damages (financial advisors, lawyers, accountants, insurance agents, etc.)
27
**Workers Compensation**
* Unlimited Medical Expenses
* Disability income (TAX FREE)
* Death benefits
* Rehabilitation (medical and vocational)
* Absolute Liability
28
**Medicare**
**does NOT cover**
* Routine footcare, glasses, hearing aids and dental work
* Emergency care outside the US (except Canada, Mexico, and Caribbean)
29
**Medicare - Long Term Care**
1. Benefits are **limited** - paysall of teh first 20 days of **skilled** care and everything over a specific amount per day for the next 80 days of **skilled** care(maximum 100 days)
2. This limited benefit is subject to substantial restrictions:
* Pays for **skilled** care only
* Admission to a nursing home must follow within 30 days of a hospital stay of thee days or more
* The patient's condition must be expected to improve
30
**HMO vs. PPO**
**HMO:**
* Provider paid for actual service rendered
* Out-of-network care not covered at all
**PPO:**
* Provider paid for actual services rendered
* Out-of-network partially covered (usually 70%)
31
**COBRA Coverage Requirements**
32
**Health Savings Account**
**HSA**
* Used in conjunction with High Deductible Health Plan(HDHP)
* Distributions tax-free if used for healthcare
* Contributions not spent are carried forward in the owners name and are portable
* Unused assets become propertyof named beneficiary upon death
* Distributions for non-medical are ordincary income taxable plus 20% penalty if under 65
33
**Definitions of Disability**
1. **Own occumpation - best definition for insured**
2. Modified any occupation
3. Split definition - own then modified
4. Any occupation (social security definition)
5. Loss of Income
34
**Disability Income**
**Policy Continuance Provisions**
**Noncancellable "noncan":** continuous term policy guaranteeing the insured's right to maintain the policy at the stated premium
**Guarenteed renewable:** continuous right to maintain the policy, but the insurer may increase the premium by class of insureds
35
**Taxation of Disability Policies**
**Taxation of premiums and benefits**
The **individual** owns the contract and **pays** teh premium.
* Permiums are not deductible
* Benefits are tax-free to the employee
The employee owns the contract and the **employer pays** the entire premium under a bonus arrangement like Section 162 disability insurance.
* Premiums are deductible by the employer as a bonus
* Benefits are tax-free to the employee
The employee owns the contract and the **employer pays** the entire premium under a salary continuation plan (group plan)
* Premiums are deductible by the employer
* Benefits are taxable to the employee
36
**Permanent Life Insurance -**
**Low risk tolerance**
* Insurance comapny controls investment return
* Assets part of general account
1. Whole Life
2. Universal Life
37
**Permanent Life Insurance -**
**High risk tolerance**
* **Client Controls investment return**
* **Assets part of separate Aaccount**
1. Variable Life
2. Variable Universal Life
38
**Dividend Options**
* **C**ash
* **R**educe premium
* **A**ccumulate with interest
* **P**aid-up additions
* **O**ne-year term / 5th dividend
39
**Nonforfeiture Options**
* Cash
* Extended term
* Paid Up Reduced Amount
40
**Settlment Options**
* Cash
* Pure life / single life
* Refund
* Period certain
* Specific income/period
* Interest only
41
**Modified Endowment Contract**
**MEC**
* Enetered into after June 21, **1988**
* Fails to meet the "seven pay test" (for exam includes ALL single premium policies)
* Distributions / withdrawals are taxed LIFO (interest first)
* Distributions under 59 1/2 also subject to 10% penalty tax (of not disabled)
* Death benefit is tax-free
42
**"MEC" Grandfather**
**Life Insurance Rules**
* If the death benefit increases by $150k or less and the insured had guarenteed insurability (no proof of insurability), the policy will **NOT** lose its grandfathered (non MEC) status.
* If the policy increases by **ANY** amount and the insured must prove insurability, the policy **MAY** lose its grandfathered (non MEC) status.
43
**Proceeds Taxable due to**
**Transfer for Value**
If an interest in a life insurance policy is transferred for valuable consideration (not a gift), the proceeds in excess of the cinsideration paid for the policy, combined with any premiums paid by the owner, are taxable as ordinary income (like a viatical). The three main **exceptions** to this rule are as follows:
* A sale of transfer to the insured
* A sale or trabnsfer to a partner or partnership in which the insured is a partner
* A corporation in whihc the insured is a shareholder or officer
* Divorce
44
**1035 Tax Free Exchange Rules**
Life → Life (OK)
Life → Annuity (OK)
Annuity → Annuity (OK)
Annuity → Life (**NO NO NO**)
45
**Buy Sell**
**Stock Redemption**
**vs.**
**Cross Purchase**
**Stock Redemption:** No step-up in cost basis
**Cross-Purchase:** Step-up in basis
46
**Split-Dollar Insurance**
## Footnote
Endo**R**sement Method
vs.
Collateral a**SS**ignment Method
Endo**R**sement Method:
* Employe**R** is the owne**R**
* Employee is not a shareholder
Collateral a**S S**ignment method:
* Employee is owner
* Employee is a **S**hareholder
* Employee a**SS**igns the policy
47
**Annuity Taxation**
Periodic Payouts Basis/Payout = Tax-Free
**Lump Sum payouts**
LIFO (interest first rule)
Ordinary income plus 10% penalty under 59 1/2
48
**Flexibilty Spending Account**
**FSA**
* Must be used by March 15th or forfeited to company (use it or LOSE it - Medical Only. Dependent Care must be used by 12/31)
* Not subject to income tax, FICA, FUTA
* Health FSA may not be used to reimburse an employee premiums paid for other health plans (such as a MSA, HSA, and LTC)
* Expenses for long-term care services cannot be reimbursed under a health FSA, but other medical expenses can be reimbursed
49
**Fringe Benefits Tax-Free**
**major ones**
* Health care premiums
* Insurance premiums on non-discriminatorygroup life policy up to $50,000
* Company car for working conditions only
* Employer-provided transit passes ($135 / month cap) or parking ($255 / month cap)
* **Occasional** overtime meal money, cab fare, theater or sporting event tickets
* Discount on service limited to 20% of selling price charged customers
50
**Fringe Benefits Taxable**
Health insurance prmiums paid for self-employed, partners, and more than 2% owners of S corporation are taxable income. **100%** is deductible as an adjustment to income on the front of the 1040. This can include all types of health insurance programs.
