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CPWA Test Prep > Risk Management and Asset Protection > Flashcards

Risk Management and Asset Protection Flashcards

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1
Q

What are the main types of insurance coverage for high-net-worth (HNW) clients?

A

The primary types include life, health, disability, property, casualty, umbrella liability, and specialty insurance (e.g., kidnap and ransom).

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2
Q

Describe umbrella liability insurance and its role for HNW clients.

A

Umbrella liability insurance provides coverage above standard liability limits, typically $1–10 million, covering bodily injury, property, and personal injury claims beyond primary policies.

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3
Q

What is Private Placement Life Insurance (PPLI)?

A

PPLI offers customizable life insurance with favorable tax treatment and asset protection, often used for wealthy clients to hold alternative investments.

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4
Q

Define the homestead exemption in asset protection.

A

Homestead exemption protects a primary residence from creditors up to a certain value, varying by state, but does not cover IRS claims.

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5
Q

What asset classes are at greater risk from creditors?

A

Assets in individual names, TIC or JTWROS accounts, second homes, non-qualified retirement accounts, and certain real estate holdings are more vulnerable.

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6
Q

Explain the role of trusts in asset protection.

A

Trusts, especially those with spendthrift provisions, shield assets from creditors by legally separating ownership from beneficiaries.

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7
Q

Describe self-settled trusts and their asset protection benefits.

A

Self-settled trusts allow the creator to be a beneficiary while keeping assets protected, particularly in states like Alaska and Delaware or offshore jurisdictions.

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8
Q

What are fraudulent conveyance laws?

A

These laws prevent asset transfers intended to defraud creditors, invalidating such transfers if made without fair consideration or to avoid liabilities.

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9
Q

What is a charging order in asset protection?

A

A charging order allows creditors to claim distributions owed to a debtor from LLC or partnership interests, without seizing control of the entity.

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10
Q

What are Domestic Asset Protection Trusts (DAPTs)?

A

DAPTs are trusts established in certain U.S. states with strong creditor protection laws, like Alaska and Delaware, allowing self-settled protection.

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11
Q

How do offshore asset protection trusts (FAPTs) work?

A

FAPTs, in jurisdictions like the Cook Islands, offer strong protection by requiring creditors to re-litigate claims under local laws, often with higher standards of proof.

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12
Q

What is the difference between revocable and irrevocable trusts in asset protection?

A

Revocable trusts do not protect assets from creditors since they can be altered by the settlor, while irrevocable trusts provide stronger protection by removing settlor control.

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13
Q

Define spendthrift provisions in trusts.

A

Spendthrift provisions prevent beneficiaries from transferring their interest, shielding assets from creditors until distributed.

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14
Q

Explain the role of life insurance in estate planning and asset protection.

A

Life insurance provides liquidity for estates, often with creditor protections, allowing families to inherit assets without debt burden.

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15
Q

What are irrevocable life insurance trusts (ILITs)?

A

ILITs hold life insurance policies outside the estate, providing tax benefits and protecting the policy’s proceeds from creditors.

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16
Q

How does the Uniform Voidable Transactions Act (UVTA) impact asset transfers?

A

UVTA standardizes fraudulent conveyance rules, allowing creditors to reverse asset transfers intended to hinder, delay, or defraud.

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17
Q

Describe asset protection in qualified retirement accounts.

A

Qualified accounts under ERISA, like 401(k)s, are generally protected from creditors, unlike IRAs, which have limited protection.

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18
Q

What are the advantages of asset protection through limited partnerships (LPs)?

A

LPs protect personal assets from claims against business debts, and charging orders limit creditors to distributions without ownership rights.

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19
Q

How can family limited partnerships (FLPs) be used in asset protection?

A

FLPs offer tax efficiency and asset protection by limiting creditor access through charging orders and separating control from ownership.

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20
Q

Explain the role of a trustee in asset protection trusts.

A

Trustees manage assets on behalf of beneficiaries, shielding assets from creditors if structured with proper legal protection.

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21
Q

What factors influence the choice between self-insurance and commercial insurance?

A

Key factors include risk assessment, loss frequency and severity, cost-benefit analysis, and client peace of mind.

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22
Q

Describe the importance of umbrella insurance for high-net-worth clients.

A

Umbrella insurance extends liability coverage beyond primary policies, offering protection from large personal claims.

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23
Q

What is second-to-die life insurance?

A

Second-to-die policies pay out after the last insured’s death, ideal for estate planning to cover tax liabilities for heirs.

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24
Q

Define income protection strategies in cases of divorce.

A

Income protection strategies include prenuptial agreements, trusts, and segregated accounts to secure assets from division.

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25
Explain property and casualty insurance’s role in asset protection.
This insurance covers risks related to real and personal property, protecting clients from financial loss due to damage or liability.
26
How does risk assessment impact asset protection planning?
Risk assessment evaluates potential threats to assets, guiding insurance and legal strategies to mitigate financial exposure.
27
What are annuities, and how do they provide protection?
Annuities offer lifetime income, with some states protecting them from creditors, making them suitable for asset protection.
28
Describe key estate planning benefits of irrevocable trusts.
Irrevocable trusts reduce estate tax liability, protect assets from creditors, and facilitate wealth transfer to heirs.
29
How does digital asset management relate to asset protection?
Digital asset management secures online accounts and intellectual property, ensuring control and security over digital wealth.
30
Explain creditor protection benefits of 529 college savings plans.
529 plans may be protected from creditors, securing funds for education purposes under certain state laws.
31
What is the “badges of fraud” concept in fraudulent conveyance?
Badges of fraud indicate intent to defraud creditors, such as transferring assets without fair consideration or concealing property.
32
Describe the role of offshore trusts in prenuptial planning.
Offshore trusts serve as an alternative to prenuptial agreements, securing assets in case of marital dissolution.
33
What legal entity protections apply to LLCs?
LLCs protect personal assets from business liabilities, with member assets shielded unless there is fraud or gross negligence.
34
How does self-insurance function as a risk management strategy?
Self-insurance involves retaining risk internally, using reserves for predictable losses rather than paying insurance premiums.
35
Define the term “asset protection trust” (APT).
APTs are designed to hold and protect assets from creditors, often in foreign jurisdictions with favorable laws.
36
What is the primary benefit of using irrevocable life insurance trusts (ILITs)?
ILITs exclude life insurance proceeds from estates, reducing taxes and providing creditor protection.
37
Describe the concept of asset segmentation in risk management.
Asset segmentation separates assets by risk level, protecting high-risk assets from low-risk holdings.
38
How do irrevocable trusts protect against spendthrift beneficiaries?
Spendthrift clauses limit beneficiaries’ control over distributions, shielding trust assets from their creditors.
39
What is income protection insurance, and who benefits?
Income protection insurance replaces lost income due to disability, providing stability for dependents and high earners.
40
Explain the “flight provision” in offshore trusts.
A flight provision relocates trust assets to another jurisdiction if the current jurisdiction becomes hostile to asset protection.
41
What is long-term care insurance, and why is it important in risk management?
Long-term care insurance covers costs of care for chronic illnesses or disabilities, protecting personal assets from healthcare expenses.
42
Define the concept of a captive insurance company.
A captive insurance company is owned by the insured parties, offering tailored coverage and potentially reducing insurance costs for businesses or wealthy individuals.
43
How does life insurance contribute to liquidity in estate planning?
Life insurance provides immediate liquidity upon death, helping cover taxes, debts, and expenses without selling estate assets.
44
Explain the role of prenuptial agreements in asset protection.
Prenuptial agreements set terms for asset division in case of divorce, protecting wealth and securing inheritance for children from prior marriages.
45
What are tenancy by the entirety protections?
This ownership type between spouses protects property from individual creditors, as both must consent to transfers or claims.
46
Describe joint tenancy with rights of survivorship (JTWROS).
JTWROS grants equal ownership and transfers to the surviving owner upon death, offering probate avoidance but limited creditor protection.
47
What is the purpose of key person insurance in businesses?
Key person insurance protects businesses against financial loss if a vital employee, such as a founder or executive, dies or becomes disabled.
48
Define professional liability insurance.
Professional liability insurance, also known as errors and omissions insurance, protects professionals from claims of negligence or inadequate work.
49
What is malpractice insurance?
Malpractice insurance covers professionals like doctors and lawyers for legal costs if sued for errors or negligence in their services.
50
Describe reinsurance and its function in risk management.
Reinsurance transfers portions of risk from one insurer to another, spreading risk and protecting insurers from catastrophic losses.
51
Explain how cybersecurity insurance protects digital assets.
Cybersecurity insurance covers losses from data breaches, cyberattacks, and associated legal costs, protecting digital information and systems.
52
What is the purpose of a life insurance buy-sell agreement in a business?
A buy-sell agreement funded by life insurance provides liquidity for co-owners to buy out a deceased owner’s share, ensuring business continuity.
53
Define flood insurance and its necessity for property protection.
Flood insurance covers damages due to flooding, often required in high-risk areas as standard property insurance typically excludes flood damage.
54
What is health insurance, and why is it critical in risk management?
Health insurance covers medical expenses, protecting individuals from high healthcare costs and ensuring access to necessary treatments.
55
Describe disability insurance and its two main types.
Disability insurance provides income replacement for disabled individuals, with short-term covering months and long-term covering years or until retirement.
56
Explain indemnity in insurance policies.
Indemnity is the principle of compensating policyholders for actual losses, preventing them from profiting from insurance claims.
57
What is a rider in an insurance policy?
A rider is an add-on provision that modifies coverage, such as adding additional benefits or excluding specific risks.
58
Define the term “underwriting” in insurance.
Underwriting assesses risk and determines coverage terms and premiums, balancing profitability and risk for the insurer.
59
What is the elimination period in disability insurance?
The elimination period is the waiting time between the onset of a disability and the start of benefit payments, affecting premium costs.
60
Describe whole life insurance and its key feature.
Whole life insurance provides lifelong coverage with a cash value component, allowing policyholders to build savings over time.
61
Explain term life insurance.
Term life insurance offers coverage for a specific period, with no cash value, and is generally more affordable than permanent policies.
62
What is universal life insurance?
Universal life insurance offers flexible premiums and adjustable death benefits, with a cash value component that earns interest.
63
Describe variable life insurance.
Variable life insurance allows policyholders to invest the cash value in sub-accounts, with potential for higher returns but increased risk.
64
Define annuities and their types.
Annuities are insurance products that provide regular payments, often used for retirement income, including fixed, variable, and indexed annuities.
65
Explain how umbrella policies interact with other insurance policies.
Umbrella policies provide additional liability coverage that activates after primary policy limits are exceeded, extending protection.
66
What is a deferred annuity?
A deferred annuity begins payments at a future date, allowing tax-deferred growth until distributions start.
67
Describe an immediate annuity.
Immediate annuities start payments soon after a lump-sum payment, providing a guaranteed income stream.
68
Define income replacement ratio in disability insurance.
The income replacement ratio determines the percentage of income covered by a disability insurance policy.
69
Define income replacement ratio in disability insurance.
The income replacement ratio determines the percentage of income covered by a disability policy, typically 60-80% of pre-disability income.
70
What is the incontestability clause in life insurance?
After a policy has been in force for a certain period, usually two years, the insurer cannot dispute its validity except for fraud.
71
Explain the suicide clause in life insurance.
The suicide clause denies death benefits if the insured dies by suicide within a specified period, typically within the first two years of the policy.
72
Describe cost-of-living adjustments (COLA) in insurance policies.
COLA increases policy benefits to keep up with inflation, commonly applied to disability and long-term care insurance.
73
Define portability in group insurance.
Portability allows employees to continue group insurance coverage independently when leaving an employer, often at a higher cost.
74
What is the grace period in an insurance policy?
The grace period is the time after a missed premium payment during which coverage remains active, usually 30 days.
75
Explain waiver of premium in insurance policies.
This provision waives premium payments if the policyholder becomes disabled, maintaining coverage without payments.
76
What are return of premium life insurance policies?
These policies refund premiums if the insured outlives the term, offering a unique blend of term insurance with a return component.
77
Describe the concept of risk pooling in insurance.
Risk pooling combines individual risks, spreading potential losses across a large group to stabilize premiums.
78
Define actuarial tables in life insurance.
Actuarial tables use statistical data to estimate life expectancy, informing premium calculations and policy terms.
79
What is cash surrender value in a life insurance policy?
It is the amount a policyholder receives if a whole or universal life policy is canceled before maturity.
80
Explain non-forfeiture options in life insurance.
These options allow policyholders to retain some benefits if they stop paying premiums, such as reduced paid-up insurance or extended term insurance.
81
What is the primary benefit of survivorship life insurance?
Survivorship life insurance covers two lives and pays out only after both insured individuals have passed, commonly used for estate planning.
82
Describe health savings accounts (HSAs) and their tax benefits.
HSAs allow tax-free contributions, growth, and withdrawals for qualified medical expenses, available to those with high-deductible health plans.
83
What is the purpose of key-person life insurance?
Key-person insurance protects a business against financial losses resulting from the death of a critical employee.
84
Define long-term care riders in life insurance.
LTC riders provide funds for long-term care expenses, using part of the life insurance death benefit to cover care costs.
85
Explain conversion privileges in life insurance.
Conversion privileges allow term policyholders to switch to a permanent policy without medical underwriting, often within a specific timeframe.
86
What is guaranteed insurability in life insurance?
This rider allows policyholders to purchase additional coverage at certain ages or life events without medical exams.
87
Describe the “split-dollar” life insurance arrangement.
Split-dollar insurance is an agreement between employer and employee to share premium costs and benefits of a life insurance policy.
88
What is the significance of an insurance audit?
An insurance audit reviews existing policies to ensure they meet current needs, aligning coverage with changing circumstances.
89
Define critical illness insurance.
This policy pays a lump sum if the insured is diagnosed with a specified illness, such as cancer or stroke, providing financial support during treatment.
90
Explain business interruption insurance.
This insurance covers lost income and expenses if a business is unable to operate due to covered events like fire or natural disaster.
91
What is umbrella insurance’s role for high-net-worth individuals?
It offers high-limit liability coverage beyond other policies, essential for protecting significant wealth from large claims.

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