Insurance Review Flashcards
(128 cards)
1
Q
What are the four categories of risk?
A
Personal, property, liability, and financial risk
2
Q
What are the seven steps in the personal risk management process?
A
Identify risk exposures
Measure risk exposures
Evaluate risk management alternatives
Select the best risk management alternative
Implement the chosen alternative
Monitor results
Adjust as necessary
3
Q
What are the most important types of risk that individuals need insurance for?
A
Life insurance (premature death of wage earner)
Health insurance (injury or sickness)
Disability insurance (loss of income from inability to work)
Property insurance (home, personal property, auto)
Long-term care insurance (custodial/skilled nursing care)
Personal liability insurance (protect assets/earnings from judgments)
4
Q
How do insurers use risk pooling?
A
By collecting premiums from many policyholders to pay for the losses of those who suffer covered events
5
Q
What are the four primary risk management techniques?
A
Risk avoidance, risk reduction, risk retention, risk transfer (insurance)
Avoidance: Most serious type of risk (high frequency, high severity)
Insurance: Severe loss, low frequency
Retention/Reduction: Minimal loss, too expensive to insure
Retention: Minor risks, e.g., car door dings.
6
Q
What should you consider before recommending insurance?
A
Client’s emergency fund and ability to self-insure, including deductibles.
7
Q
Define Law of Large Numbers.
A
The principle that a larger group of similar risks improves predictability of losses
8
Q
What is a peril?
A
The cause of a loss (e.g., fire, theft)
9
Q
What is a hazard?
A
A condition increasing the chance or severity of loss (physical, moral, morale)
10
Q
What is adverse selection?
A
The tendency of those most likely to have a loss to seek insurance.
11
Q
What are the requisites for an insurable risk?
A
Large number of similar exposures, definite/measurable loss, accidental, not catastrophic to insurer
12
Q
What is the principle of indemnity?
A
Insurance should restore the insured to their financial position before the loss, no profit
13
Q
What is subrogation?
A
Insurer’s right to pursue a third party after paying the insured’s claim
14
Q
What is insurable interest?
A
The policyholder must have a financial/emotional stake in the insured at policy inception (and at loss for property/liability)
15
Q
When must insurable interest exist for life insurance?
A
Only at the time of policy inception
16
Q
Who can you have insurable interest in?
A
By blood, marriage, or business relationship.
17
Q
What is the law of agency?
A
The agent acts on behalf of the insurer and can bind the insurer by their actions.
18
Q
What is the difference between a general agent, independent agent, and broker?
A
General agent: represents one insurer; Independent agent: represents multiple insurers; Broker: represents the policy owner
19
Q
What are exclusions?
A
Provisions specifying what is not covered to keep premiums down
20
Q
What are riders/endorsements?
A
Written additions/modifications to an insurance contract, specifying additional benefits or changes
21
Q
What are the main valuation methods for insured losses?
A
Replacement cost, actual cash value (replacement cost minus depreciation), agreed value (for art/antiques)
22
Q
What is a deductible?
A
The amount the insured must pay before insurance covers a loss; helps eliminate small claims and reduce premiums.
23
Q
What is coinsurance (property insurance)?
A
Requires the insured to cover a stated percentage (usually 80%) of property value; if underinsured, insurer pays a reduced amount per formula
24
Q
What are the main rating agencies for insurance companies?
A
A.M. Best’s (A++ to D), Moody’s (Aaa to Caa)
25
Who regulates the insurance industry?
Regulation is at the state level: legislative (laws), judicial (interpretation), executive (insurance commissioner, NAIC member).
26
What is the NAIC?
The National Association of Insurance Commissioners, issues model legislation and watch lists but has no regulatory power
27
What is the Capital Needs Approach?
Considers income needs, education, and retirement funding to determine insurance amount
28
What is the Human Life Value Approach?
Calculates income earned less amount consumed by insured to determine insurance need
29
What is the Capital Retention Approach?
Provides income from capital without invading principal
30
What is the Income Retention/Multiplier Approach?
Maintains income level or multiplies income for a set period.
31
What are the main types of life insurance?
Term, Whole Life, Universal Life, Variable Life, Variable Universal Life
32
What are the key features of term life insurance?
temporary, no cash value, convertible, max death benefit per premium dollar, for temporary needs
33
What are the key features of whole life insurance?
permanent, cash value, lifetime coverage, suitable for estate/retirement needs.
34
What are the key features of Universal Life insurance?
flexible premiums/face value/cash value, insurer invests cash value, can use cash value for premiums
Type A and Type B
35
What are the key features of Variable Life insurance?
Cash value invested in subaccounts by insured, death benefit/cash value fluctuate with investment performance
36
What are the key features of Variable Universal Life Insurance?
combines flexibility and investment options, no guaranteed return, separate account not insurer’s asset
37
What are dividend options for whole life policies?
Cash, reduce future premiums, accumulate at interest, paid-up additions, one-year term insurance (CRAPO)
38
What are first-to-die and second-to-die (survivorship) policies?
First-to-die: pays at first insured’s death
Second-to-die: pays at second insured’s death
39
What are nonforfeiture options?
Surrender for cash, paid-up life insurance, extended term insurance
40
What are settlement options?
Lump sum, interest only, annuity payments (fixed amount, life income, fixed period, life income with period certain, joint and last survivor)
41
What is a cross purchase agreement?
Partners buy insurance on each other; increases surviving partners’ basis but requires many policies
42
What is an entity purchase agreement?
Company buys insurance on each partner; fewer policies, no basis increase for survivors
43
What is key person insurance?
Protects business from loss of a key employee; premiums not deductible, proceeds tax-free
44
What is an annuity?
Periodic payment for a fixed period or life, protects against outliving assets, not for leaving assets to heirs
45
What are the types of annuities?
Immediate (payments start now), deferred (payments start later), flexible premium, single premium, fixed, variable, equity indexed
46
What are the main payout options?
Pure life (Payments stop at death of annuitant.)
life with period certain (Payments continue for minimum term or life, whichever is longer.),
installment refund (Beneficiary receives remainder if annuitant dies early)
joint and survivor (Payments continue until both annuitants die)
47
Are life insurance death benefits taxable?
Generally excludable from taxable income.
48
How are cash values and loans taxed?
Cash value not taxed if withdrawn at death; loans are tax-free unless policy is a MEC
49
What is the transfer for value rule?
If a policy is sold, proceeds above basis are taxable unless transferred to insured, business partner, partnership, or corporation of insured.
50
How are annuity withdrawals taxed?
Pre-1982: FIFO (basis out first, not taxable); Post-1982: LIFO (earnings out first, taxable)
51
How are group life insurance premiums taxed?
Employer-paid premiums for coverage over $50,000 are taxable income to employee.
52
What does major medical insurance cover?
Hospitalization, physician fees, therapy, drugs; usually 80/20 coinsurance, max out-of-pocket, excludes dental/vision
53
How do deductibles and coinsurance work?
Deductible paid first, then insured pays coinsurance until max out-of-pocket, then insurer pays 100%
54
What is the ACA/PPACA?
Requires most to have insurance, no pre-existing condition exclusions, dependent coverage to age 26, no lifetime/annual limits, standardized plan categories (Bronze, Silver, Gold, Platinum)
55
What are key differences of HMO and PPO health plans?
HMO= Paperwork not required in in-network, In-network only doctor access, and generally cheaper.
PPO= Paperwork required, more flexible doctor access, and generally more expensive
56
What are the 2025 HSA contribution limits?
Single: $4,300
Family: $8,550
Age 55+ catch-up: $1,000
57
What expenses are qualified for HSA distributions?
Medical, dental, vision, COBRA, LTC, Medicare premiums after 65, but not cosmetic surgery
58
What are tax implications for non-qualified HSA distributions?
Subject to income tax and 20% penalty if under age 65; only income tax if 65 or older
59
What risk management strategy should Joe use for his daughter’s $1,000 VW Bug?
Risk retention (minor property, not worth insuring).
60
What type of hazard is a banana peel left on the porch?
Physical hazard
61
If Sully’s insurer sues the party that hit his car after paying his claim, what is this called?
Subrogation
62
Jeff can buy life insurance on whom?
Wife, son, business partner, but NOT his neighbor (no insurable interest)
63
What is the coinsurance formula for property insurance?
(Amount of Coverage Purchased ÷ [Coinsurance % × Property Value]) × (Loss – Deductible)
64
What is the exclusion ratio for annuities?
Basis divided by total expected payments.
65
What are the ACA plan levels and their coverage percentages?
Bronze (60%), Silver (70%), Gold (80%), Platinum (90%).
66
What is the ACA’s requirement for dependent coverage?
Coverage for children up to age 26.
67
What is required to contribute to an HSA?
High Deductible Health Plan (HDHP).
68
What expenses are qualified for HSA?
Dental, vision, COBRA, Medicare premiums (65+), etc.
69
What is the penalty for non-qualified HSA withdrawals before age 65?
20% penalty plus income tax.
70
Who must offer COBRA?
Employers with 20+ employees offering group health plans.
71
How long does COBRA coverage last?
18-36 months, depending on event.
72
How much can employers charge for COBRA?
Up to 102% of the premium.
73
What are the seven types of LTC coverage?
Skilled nursing, intermediate, custodial, home health, assisted living, adult day care, hospice.
74
What are the requirements for LTC benefit eligibility?
Chronically ill (2 of 6 ADLs for 90+ days) or cognitive impairment.
75
What are the 6 Activitities of Daily Living (ADLs)?
Bathing: The ability to wash oneself and maintain personal hygiene.
Dressing: The ability to select appropriate clothes and put them on.
Eating: The ability to feed oneself, not including meal preparation.
Toileting: The ability to get to and from the toilet, use it appropriately, and clean oneself.
Transferring: The ability to move in and out of bed or a chair independently.
Continence: The ability to control bladder and bowel function
76
Are LTC premiums deductible?
Yes, up to age-based limits and subject to 7.5% AGI threshold.
77
What is "own occupation" disability insurance?
Pays if you cannot do your own job.
78
What is "any occupation" disability insurance?
Pays only if you cannot do any job.
79
What is "modified own occupation"?
Pays if you can't do your job and are not working.
80
How are disability benefits taxed if the employee pays premiums?
Benefits are tax-free.
81
How are disability benefits taxed if the employer pays premiums?
Benefits are taxable.
82
What does Coverage A cover?
Dwelling and attached structures.
83
What does Coverage B cover?
Other structures (detached garages, sheds).
84
What does Coverage C cover?
Personal property.
85
What does Coverage D cover?
Loss of use.
86
What does Coverage E cover?
Personal liability.
87
What does Coverage F cover?
Medical payments to others.
88
What are the 12 basic named perils?
Fire, vehicles, lightning, smoke, windstorm, vandalism, hail, explosion, riot, theft, aircraft, volcano.
89
What are the 6 broad named perils?
Basic perils plus falling objects, weight of ice/snow/sleet, overflow of water, bursting of appliances, freezing, electrical damage.
90
What are common exclusions?
Earthquake, flood, war, neglect, intentional acts, ordinance/law, power failure.
91
Who provides flood insurance?
National Flood Insurance Program.
92
What is the waiting period for flood insurance?
30 days (1 day if purchased after a map update).
93
What is covered by inland marine insurance?
Scheduled valuables (jewelry, furs, collectibles, etc.).
94
What is a Personal Auto Policy (PAP)
A standardized insurance policy designed for individuals who own private passenger vehicles. A PAP typically provides coverage for:
Liability (for injuries or property damage you cause to others)
Medical payments
Uninsured/underinsured motorists
Damage to your own vehicle (collision and comprehensive coverage)
95
What does Part A of PAP cover?
Liability.
96
What does Part B of PAP cover?
Medical payments.
97
What does Part C of PAP cover?
Uninsured motorists.
98
What does Part D of PAP cover?
Damage to your auto (collision/comprehensive).
99
What vehicles are excluded from PAP?
Motorcycles, company cars, vehicles for regular use, racing vehicles.
100
What is negligence?
Failure to act as a prudent person.
101
What are defenses to negligence?
Assumption of risk=The person assumed the risk when they entered the defendant's property/business
Contributory negligence=Person's negligent actions contributed to loss, cannot recover
Comparative negligence=Person's negligent actions contributed to loss, can recover portion of loss from other negligent party
Last clear chance= The plaintiff can collect even if there was contributory negligence on the plaintiff's part if the plaintiff can prove the defendant had a last clear chance to avoid the accident
102
What does a Personal Liability Umbrella Policy (PLUP) provide?
Excess liability coverage above auto and homeowners policies.
103
What is errors & omissions insurance?
Covers professionals for negligent acts or omissions.
104
What is malpractice insurance?
Covers bodily injury from professional services (e.g., doctors).
105
What is a CLUP?
Commercial liability umbrella policy.
106
What is a BAP?
Business auto policy
107
What is the OASDI tax rate and wage base for 2025?
6.2% up to $176,100.
108
What is the Medicare tax rate?
1.45% on all wages; additional 0.9% over $200,000 (single) or $250,000 (MFJ)
109
How many quarters are needed for full retirement benefits?
40 quarters.
110
What is the reduction for early retirement?
5/9% per month for first 36 months, 5/12% for each additional month.
111
What is the delayed retirement credit for those born 1943 or later?
8% per year.
112
What is the Social Security definition of disability?
Expected to last 12+ months or result in death and inability to perform any occupation.
113
What is Medicare Part A?
Hospital insurance.
Deductible is $1,676 per benefit period, 1st 60 days
114
What is Medicare Part B?
Medical insurance (doctor, outpatient).
Pays 80% of approved charges
Does not cover dental, eye exams, cosmetic, hearing aids, or physical exams
Automatically enrolled
Premiums deducted from social security, standard rate $185
Deductible is $257 per year, then Part B covers 80% after that
115
What is Medicare Part C?
Medicare Advantage (managed care).
Covers all but hospice.
116
What is Medicare Part D?
Prescription drug coverage.
117
How much of Social Security benefits may be taxable?
Up to 85% if income exceeds thresholds ($32,000 MFJ, $25,000 single).
118
HO-1 (Basic Form) – key characteristics
Covers only basic named perils (1-12, such as fire, theft, vandalism, etc.). Dwelling only, not personal property. Rarely offered today; very limited coverage.
119
HO-2 (Broad Form) – key characteristics:
Covers both basic and broad named perils (1-18). Protects dwelling and personal property. Adds perils like falling objects, water damage from appliances, and more compared to HO-1.
120
HO-3 (Special Form) – key characteristics:
Most common form for homeowners. Provides open peril (all-risk) coverage for dwelling and other structures, meaning all physical losses are covered except those specifically excluded. Personal property is covered on a named-peril basis.
121
HO-4 (Contents Broad Form/Renters) – key characteristics
Designed for renters. Covers personal property for the same broad perils as HO-2. Does not cover the building itself. Includes improvements and betterments made by the tenant.
122
HO-5 (Comprehensive Form) – key characteristics:
Provides open peril (all-risk) coverage for both dwelling and personal property. Most comprehensive form; covers all physical losses to both building and contents unless specifically excluded.
123
HO-6 (Unit Owners Form/Condo) – key characteristics:
For condominium unit owners. Covers personal property and interior building items (improvements, fixtures) for basic and broad named perils. Building coverage is limited to interior; the association covers exterior/common areas.
124
HO-7 (Mobile Home Form) – key characteristics:
Specialized for mobile or manufactured homes. Coverage is similar to HO-3 but tailored to the unique risks of mobile homes. May have specific eligibility and coverage requirements.
125
HO-8 (Modified Coverage Form) – key characteristics
Designed for older or historic homes where replacement cost exceeds market value. Covers dwelling and personal property for basic named perils only. Pays repair cost (not full replacement cost), making it suitable when full replacement is not practical.
126
What are the disability requirements for social security?
Age 31 and greater, fully insured (40 quarters) and earned 20 quarters of last 40 quarters.
24-31, 1/2 of calendar quarters elapsed since worker reached age 21
21-24, 6 quarters earned
Currently insured has no spousal benefit
127
Should I know the social security flashcard deck?
Yes, it is more comprehensive than the social security details covered in this deck.
128
