Risk Management and Insurance

Question 1

investment in life insurance contract (basis)

Answer 1

premiums paid - divs received - outstanding loans or withdrawals = investment in contract

Question 2

MEC taxation

Answer 2

death benefit = no income tax

withdrawals/loans = LIFO , taxed as ordinary income and if under 59.5 then additional 10% penalty on both loans and withdrawals

Question 3

life insurance taxation (non MEC)

Answer 3

death benefit = no income tax

loans = no income tax

withdrawals = FIFO, taxed as ordinary income

Question 4

life insurance gain

Answer 4

surrender value - investment in contract taxed as ordinary income

Question 5

fixed annuity exclusion ratio

Answer 5

investment in contract/expected return

Question 6

taxation of annuitization

Answer 6

partial return of basis and partially taxable using the exclusion ratio

Question 7

taxation of lump sum annuity withdrawals (prior to annuitization)

Answer 7

Pre Aug 14 1982: FIFO

after: LIFO, and 10% penalty if before age 59.5

Question 8

variable annuity exclusion ratio

Answer 8

investment in contract/annuitant’s life

payments beyond life expectancy are fully taxable (unless payments begin on or before Dec 21 1986)

Question 9

Any Occ

Answer 9

inability to perform the duties of any occupation then policy will pay - must be unable to do any job (strictest)

Question 10

Own Occ

Answer 10

inability to perform your own job then policy will pay (best if you are the insured)

Question 11

disability: guaranteed insurability rider

Answer 11

guarantees the insured the right to purchase additional amounts of disability without future evidence of disability

Question 12

disability: noncanellable

Answer 12

policy is continuous, guarantees the right to renew until a certain age or number of years with a fixed premium

Question 13

disability: guaranteed renewable

Answer 13

right to renew is guaranteed, but insurance company can increase premiums based on class (group basis)

Question 14

disability: conditionally renewable

Answer 14

continuous term policy that the insurance company may terminate if certain contractual conditions are met (ex: retirement)

Question 15

taxation of disability benefits

Answer 15

ER pays premiums: taxable to EE, tax deductible by ER

EE pays premiums: tax free benefits

Question 16

COBRA terms of coverage

Answer 16

18 months: change in employment status up to 29 months: EE meets SS def of disability 36 months: death, divorce, termination of plan, medicare

Question 17

COBRA applies to

Answer 17

employers who have a plan and 20 or more employees (part time = 1/2 employee)

Question 18

Medicare Parts

Answer 18

A: Hospital care benefits

B: physician’s services, home health services, diagnostic tests, medical equipment, and outpatient services

C: medicare advantage

D: Drugs

Question 19

Medicare Part A

Answer 19

hospital care benefits - medicare pays for up to 90 days for each benefit period. Benefit period ends when patient is out of the hospital for 60 days.

skilled nursing care - will pay the first 20 days, for days 21-100 will only pay partial amount, no coverage after 100 days

most people do not pay a monthly premium for part A if they or their spouse have 40 or more quarters of medicare covered employment

• 30-39 quarters pay $259
• few than 30 pay $471

Question 20

HSA

Answer 20

above the line deduction, and tax free distribution if used for qualifying medical expenses for qualifying individuals with a high deductible health plan

if contributions exceed limits, 6% excess tax imposed on excess (mind the max or 6% tax)

nonqualified withdraws subject to 20% penalty. NO penalty after age 65

can do a one time rollover from FSA or HRA to HSA

can also do a one time rollover from IRA to HSA

HSAs can let funds accumulate until needed, NO RMDS

Question 21

Long Term Care ADLs

Answer 21

Bathing

Eating

Dressing

Toileting

Transferring

Continence

OR severe cognitive impairment

Question 22

ISO taxation

Answer 22

1 year from exercise/2 years from grant:

• grant:* no tax
• exercise:* no regular tax, FMV - exercise price = AMT positive adjustment
• sale:* FMV - exercise price = capital gain, negative AMT adjustment

Question 23

NQSO taxation

Answer 23

• grant:* none
• exercise:* FMV - exercise price = W2 income, subject to payroll taxes
• sale:* current FMV - FMV at exercise = capital gain

Question 24

ISO taxation (disqualifying disposition)

Answer 24

deposing of stock before holding period expires

• exercise:* FMV - exercise price = W2 income, NOT subject to payroll taxes
• sale:* current FMV - FMV at exercise = gain or loss (ST or LT)

if loss then include the excess of the amount realized on the sale over the adjusted basis into ordinary income

Question 25

Homeowners coverage

Answer 25

*Section I (Coverage: A B C D)* **A** (abode) - Dwelling and Attached Structures **B** (building) - Other structures, separate from dwelling (detached garage, fences, sheds) **C** (contents) - Contents and Personal Property **D** ('dditions) - Loss of Use *Section II (Coverage: E F)* **E** (enemy) - Liaiblity **F** (First Aid) - Medical Payments

Question 26

actual cash value

Answer 26

personal property replacement cost - depreciation

Question 27

homeowners: coverage A

Answer 27

dwelling includes: * structures attached * materials and supplies inside land excluded if less than 80% of replacement cost, then insurance will only pay partial should recommend 100% replacement cost covered

Question 28

homeowners: coverage B

Answer 28

detached garage and other structures 10% of amount of insurance on dwelling applies to structures does not apply to anything used for business purpose does not apply to a structure rented to someone who is not a tenant of the building

Question 29

homeowners: coverage C

Answer 29

personal property extends world wide generally insurance will be _**50%** of the insurance on the dwelling_ (can be changed) excluded when covered by another policy if personal property is held somewhere other than the residence - **then 10% of insurance on dwelling**

Question 30

homeowners: coverage D

Answer 30

loss of use: * additional living expense * fair rental value * prohibited use HO-1 and HO-8 10% of dwelling HO-2, -3 and -5 30% of dwelling HO-4 30% of personal property HO-6 40% of personal property

Question 31

homeowners: coverage E

Answer 31

personal liability on or off premises claims against bodily injury and property damage covered personal injury not covered

Question 32

homeowners: coverage F

Answer 32

medical payments to others does not cover you or your family or employees do not need to be liable

Question 33

homeowners exclusions

Answer 33

**P**ower failure **O**rdinance or law **W**ater damage **W**ar **N**eglect **I**ntentional loss **N**uclear hazard **E**arth movement POWW NINE

Question 34

HO-2

Answer 34

broad form (coverage for 18 named perils)

Question 35

HO-3

Answer 35

special form - open peril except broad form for coverage C can be endorsed with HO-15 for open perils

Question 36

HO-4

Answer 36

contents broad form - renters (coverage for 18 named perils) loss of use limited to 30% of coverage C

Question 37

HO-5

Answer 37

comprehensive form similar to HO-3, but everything open peril

Question 38

HO-6

Answer 38

condo owners broad form (18 named perils) loss of use coverage 40% of coverage C

Question 39

HO-8

Answer 39

modified coverage form for older homes. ex - victorian homes basic coverage

Question 40

Basic Perils

Answer 40

1. **F**ire 2. **L**ighting 3. **E**xplosion 4. **S**moke 5. **H**ail 6. **W**indstorm 7. **A**ircraft 8. **R**iot 9. **T**heft 10. **V**ehicle 11. **V**andalism 12. **V**olcanic erruption FLESH WARTS VVV

Question 41

broad perils

Answer 41

* basic perils 1-12 +* 13. falling objects 14. weight of ice, snow sleet 15. discharge or overflow of water or steam 16. tearing apart, cracking, bulging, burning, of a steam hot water air conditioning, or fire protective sprinkler, or from within a household appliance 17. freezing of plumbing, heating, air conditioning, or automatic fire sprinkler or household appliance 18. sudden and accidental damage from artificially generated electrical current

Question 42

group term life insurance

Answer 42

first $50k of coverage paid by ER is tax free to EE any amount over the premium per $1k is included in w2 income less EE contribution premiums paid by ER are deductible by ER plan must be nondiscriminatory or loses tax benefits

Question 43

* what qualifies as substantial risk of forfeiture: * unsecured promise to pay? * rabbi trust? * secular trust?

Answer 43

* **unsecured promise to pay** - yes * **Rabbi trust** * **​**yes, funds are set aside but subject to the employers creditors in event of bankruptcy or liquidation * no tax to EE or deduction for ER * taxation/deduction happen when in constructive receipt * **Secular trust** - * NO, funds are secured for the benefit of the EE. * EE is taxed on amounts contributed to the trust and ER gets deduction

Question 44

unfunded vs funded

Answer 44

unfunded - mere promise to pay, funds are subject to employeers creditors. incoem is not constructively recieved so not taxable funded - set aside from claims of creditors, EE must include value in gross income

Question 45

FSA

Answer 45

funded by voluntary salary reductions (not subject to income or payroll tax), may include employer contributions (ER will get tax deducion) two types: health and dependent care any unsed amount within a certian period is forfeited LTC and over the counter meds are not eligible for reinbursement max salary reduction for dependent care = $5k max medical expense reimbursement is $2,750

Question 46

Medicare Part B

Answer 46

basic premium $148.50, higher if income is above $88k people who are eligible for A automatically are enrolled in B $203 deductible, then 80/20 coinsurance covered expenses: physicians services, home health services not requiring a hospital stay, diagnostic tests, medical equipment, and all outpatient services

Question 47

auto liability coverage: split limit basis

Answer 47

bodily injury for one person/all persons injured in a single accident/property damage ex: 100/300/50 * 100 = $100k bodily injury for one person * 300 = $300k all persons injured in a single accident * 50 = $50k property damage

Question 48

PAP parts

Answer 48

* A: liability coverage (mandatory - most states minimum is $25k) * B: medical payments * C: uninsured motorists * D: Damage to your auto * E: duties after accident or loss * F: general provisions

Question 49

home insurance: amount insurance company pays

Answer 49

(amount of insurance carried/amount of insurance required) X loss - deductible

Question 50

types of hazard

Answer 50

physical: physical characteristics of the person or proeprty increase chance of loss. ex: oily rags left near furnace moral: chance of loss due to dishonesty (person intentionally causes loss morale: indifferance to loss due to insurance (creates carlessness)

Question 51

section 83b election

Answer 51

employee who receives restricted stock may elect to recognize the income immediately rather than waiting until no longer a substantial risk of forfeiture EE will include FMV of the stock less amount paid as w2 income subject to payroll taxes any subsequent appreciation is treated as cap gains

Question 52

last month rule: HSA

Answer 52

if you are eligible for an HSA on Dec 1st you are considered eligible for the entire year