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CFP Exam Prep (July 2023) > Risk Managment and Insurance Planning > Flashcards

Risk Managment and Insurance Planning Flashcards

(62 cards)

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1
Q

Risk Avoidance

A

Used when risk cannot be reduced or transferred

ie. deciding not to go bungee jumping or choosing not to drive due to fear of being in an accident

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2
Q

Risk Reduction

A

Techniques used to reduce the likelihood of loss

ie. security systems, smoke detectors and seatbelts

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3
Q

Risk Transfer

A

Shifting financial consequences associated with a risk to a third party

ie. buying insurance

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4
Q

Risk Retention

A

Intentionally or unintentionally retaining the risk of loss, some or all, from exposure

ie. self insuring or insurance deductibles

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5
Q

HSA (who, when and tax advantages)

A

Individuals and employers can contribute (typically individuals)

If you are insured on the first day of the last month of the tax year you can make full HSA contributions for the Tax year

Pre-tax contributions, tax free growth, and tax free distributions (if used to pay for medical). Triple tax advantage

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6
Q

HSA Contribution Limits

A

Self- $3,850
Family - $7,750
Catch up (55 or older)- $1,000 additional

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7
Q

HSA Uses

A

Medical and superscription expenses

Includes OTC drugs, Dental, Vision, and qualified LTCi premiums

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8
Q

HDHP- Deductibles and out of pocket maximums

A

Minimum deductible- self- $1,500
Family - $3,000

Maximum out of pocket -
self - $7,500
Family- $15,000

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9
Q

Cobra

A

Group plans of 20 or more employees required to extend temporary extension of health coverage in certain circumstances

AKA continuation coverage

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10
Q

Cobra qualifying event

A

Termination (or reduction in hours)- 18 months (E,S,DC)
Disability through SS- 29 months (E,S,DC)
Employee enrolled in medicare, Divorce or death - 36 months (S,DC)
Loss of dependent status under the plan - 36 months (DC)

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11
Q

Cobra Costs

A

Costs can be passed on to the beneficiary at a max of 102% of the plan cost

Due monthly

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12
Q

Long-term Care locations (least intensive to most)

A

Home Maker Services
Home Health Aid
Adult Day Health Care
Assisted living facilities
Nursing home care

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13
Q

Medicare and Long term care

A

Medicare does not cover LTC

Will pay for a limited time after hospitalization
Days 1-20 - zero co pay
Days 21-100 - Patient pays $200 coinsurance per day
Days 101+ = Patient pays all costs

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14
Q

LTCi - Benefit period

A

Specific time frame (2 years) or pool of money

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15
Q

LTCi- Elimination Period

A

Waiting period before benefits kick in

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16
Q

LTCi- Daily Benefit

A

Maximum insurance will pay per care for care. Set at inception of policy

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17
Q

LTCi- Rider

A

add on features to the policy. An important one to consider is inflation protection

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18
Q

LTCi- Waiver of Premium

A

The policy holder does not pay premiums while receiving benefits

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19
Q

LTCi- Renew-ability

A

Most LTCi policies are guaranteed renewable

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20
Q

Qualified LTCi Requirements

A

Payable for LTC services only
Must be guaranteed renewable
Does not reimburse for medicare reimbursable expenses
No cash surrender value
Dividends must reduce premiums or increase benefits
Limitations and exclusions are prohibited, except preexisting conditions within 6 months of application

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21
Q

Qualified LTCi Benefits

A

Benefits are tax free
Premiums are qualified medical expenses for tax purposes
Premiums can be paid from HSA
If premiums are paid by the employer the payments and the benefit are tax free

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22
Q

LTC Benefits triggers

A

Option 1- Unable to preform 2 of the 6 activities of daily living for 90+ days

Option 2- substantial cognitive impairment

Either must be certified by a doctor

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23
Q

Activities of Daily Living (ADLs)

A

Bathing
Continence
Dressing
Eating
Transferring on and off toilet

Blindness and unable to walk are not ADLs

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24
Q

Partnership Long-term Care insurance

A

Partnership between states and insurance companies
Provides asset protection if LTCi benefits are exhausted and insured files for medicaid
Total amount paid under LTCi is added to Medicaid spend down limits and protections

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25
Disability insurance (Any, Own, Modified, SS)
Any Occ- payable if individual is disabled and can not engage in any occupation Own Occ- Payable if policy holder can not preform their own occupation Modified - Own occ to start then changes to Any Occ after a set amount of time Social Security- Unable to preform any occupation and the condition is expected to last no less then 12 months or result in death
26
Taxation of Disability Benefits
Employer pay premiums- benefits are taxable to the insured Employee pays premium with tax free dollars- benefits are taxable Employer pays but includes the premiums are compensation to the employee - Benefits are tax free Employee paid with after tax dollars- Benefits are tax free
27
Term Life Insurance
Lowest premium at issue No Cash Value May be renewable May be convertible to permanent May be participating (dividends)
28
Types of Term Life insurance
Level Term- death benefit remains level over the guaranteed term; premiums increase upon expiration of initial guaranteed term Decreasing term- Level premiums over term, benefits reduce over time (usually connected with debt such as a mortgage) Annual Renewable- 10, 20, or 30 year term These can also have first to die or second to die riders
29
Permanent Life Insurance
Higher Premiums than term at issue Builds Cash Value Cash value accessible by loans of with drawls May be participating
30
Universal Life
Option A- Death benefit remains level Option B- Death benefit is face amount plus cash value
31
Whole Life
Guaranteed death benefit Guaranteed premiums
32
Variable life insurance policies
All Variable policies: Cash Value sub-accounts give policy owners investment choices Variable universal life: Cash Value not subject to insurance companies creditors Not held in general account
33
Life Insurance: Termination Options
Cash Surrender value Extended term Reduced Paid-up policy
34
Cash Surrender Value
The insurance company pays the cash value to the policy owner as a lump sum and the contract ends
35
Extended Term
The policy owner uses the cash value from their policy to purchase a single payment (premium) term life insurance policy. Benefit stays the same but there is an end to the policy, no residual cash value
36
Reduced Paid-up insurance
The policies cash value is used to buy a "paid-up" policy. The policy will have reduced death benefits but will retain a cash value that will grow and be used to pay for the new policy
37
Modified Endowment Contracts (MECs)
Cash Value insurance policy that has failed the 7-pay test Changes tax treatment of cash distributions while insured is alive Death benefit is still tax free
38
7-Pay test
If a policy is fully paid up on or before the 7th year of payments then is fails the 7-pay test and is considered a MEC
39
Non-MEC vs. MEC Policies
Both- Transfer tax free at death and distributions are taxable as ordinary income Non-MEC- distributions are FIFO and no penalty for taxable distributions MEC- Distributions are LIFO and there is a 10% penalty tax for taxable distributions before age 59 1/2
40
Viatical Settlements
A way for a seriously ill person to get cash by transferring a life insurance policy to a viatical settlement company for cash of a discounted amount of the death benefit
41
Terminally ill vs. Chronically ill
Terminal- A condition that is expected to result in death within 24 months of doctors certification Chronically- a person who is unable to preform at least 2 of the 6 ADL for a period of at least 90 days
42
Viatical Settlment Tax Treatment
Policy Holder (Viator) terminal- excluded from gross income Chronic- excluded from gross income if used to pay for long term care services Viatical settlement company- cash settlement plus additional payments is basis, money that is received in excess of basis will be taxable
43
Buy-Sell: Cross purchase agreement
Transfers business interest among partners. Advantages- Simple if few owners death benefit received tax free increases basis for surviving owners Disadvantages- If big age difference younger partner pay much more Difficult when dealing with many owners
44
Buy-Sell: Entity Purchase agreement
Transfers business interest back to the business using life insurance policy Advantages- preferred solution for business with many partners Death benefit tax free to the business Business pays policy premium Disadvantages- No increase basis for surviving owners, causing more gains upon future sales
45
Buy-sell: wait and see agreement
Gives flexibility in transferring of business interests step 1- business has 1st option to purchase step 2- surviving partner(s) have the option to purchase if business waiver option or purchased less then half Step 3- Business is required to purchase remaining stock
46
Annuities Tax Treatment
LIFO 10% penalties for withdrawls before 59 1/2 Tax exclusion basis formula Basis/Expected payouts=Tax free portion Tax exclusion ends when full basis has been recovered
47
Annuity exclusion for life (Dates)
December 31 1986 before this date exclusions from annuities continues even after full basis was recovered
48
Annuity FIFO/LIFO switch dates
August 14, 1982 Annuity contract dates before this withdrawals are FIFO Annuity contracts signed after this date are LIFO
49
Types of Home Owners Insurance
Property- Type 1 Liability- Type 2
50
Home Owners Insurance Property
A- Address B- Backyard C- Crate and Crap D Damaged/Destroyed Digs
51
Home Owners Insurance: Liability
E- Exposure to legal Action F- Funds for others Fractured Femurs
52
Home Owners Insurance: Named Peril
Covers specific perils or "causes of loss" that are covered. Everything else is not covered IF not named...Not covered
53
Home Owners Insurance: Open Peril
Coverage specifically excludes perils or "causes of loss" that will not be covered. Everything else is covered Coverage is open to everything except what is named
54
Home Owners Insurance Form
HO-02- Broad Form- Basic Coverage -03 Special Form- Better Coverage -04 Contents Broad Form- Renters insurance -05 Comprehensive- BEST HO coverage -06- Unit owners form- condo/co-op (studs in) 08- Modified Coverage- older/Historic Homes only- less coverage
55
Home Owners Co-Insurance Requirements
Minimum 80% of replacement cost
56
Home Owners Co-Insurance Formula
[(Did Have/ Should Have) * Loss amount] - deductible
57
Automobile Insurance Types
PAP (personal automotive policy)- part A- Liability Part D- Damage to your auto
58
Automobile Coverage Part A
Single Limit- Amount is a single dollar cap per collision Split Limit- Bodily Injury (max per person)/ Bodily Injury (max per collision)/ Max property damage per collision
59
Automobile Part D
Collision- Damage to vehicle caused by an accident Comprehensive - All other physical damage to the auto *Hitting a deer is comprehensive not Collision
60
Personal Liability Umbrella Policy (PLUP)
Critical addition to clients property and casualty insurance and significantly enhances liability coverage for a small premium *in case study, if a client doesn't have a PULP protection a correct answer should recommend this addition
61
PULP requirements
Typically minimum Coverage above the state/federal legal minimums Auto- 300k/300k/100k or 250k/500k/100k Homeowners - $300k section E liability coverage
62
PULP- Does/ Does not Cover
Typically does cover cost of defense Does not cover insured's business interests Does Not cover anything until underlying policy is exhausted

CFP Exam Prep (July 2023) (6 decks)

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