2. Insurance Planning. - All Exam Tips and Practitioner's Advice Flashcards
Lesson 1. Principles of Insurance
Course 2. Insurance Planning
AUDIO EXAM TIP:
Define Peril
A peril is defined as the cause of the loss. For example, fires, tornadoes, heart attacks, and criminal acts constitute perils.
Insurance policies provide financial protection against losses caused by perils. Insurers call policies that specifically identify a list of covered perils specified-perils contracts.
The alternative format is to cover all losses except those specifically excluded. Insurers call this type of policy an open-perils contract.
Exam Tip: CFP Board often tests the concepts of loss and peril by presenting scenarios in which a specific loss occurrs. Remember that the cause of the loss is the peril.
Audio:
* Peril - highly testable
* Peril is an actual cause of loss
* Could be fire, windstorm, flood, lightning, theft, smoke
* Insure against losses caused by those perils
* One type of home insurance is written on a specifiied perils basis. Only perils covered are specifically listed in the contract.
* Versus open perils contracts - all perils are covered, unless it’s specifically excluded. Better for the client. Will cover more things. More expensive.
Define Hazards
Hazards are conditions that increase the probability of loss from a peril, by increasing either the frequency or the severity of potential losses.
* For example, every home faces the peril of destruction by fire. Storing oily rags near the home’s furnace would be an example of a hazard.
The hazard increases the chances of the peril occurring. If an insured materially increases a hazard, the insurer may suspend the insurance coverage.
Hazards can be separated into four categories:
1. Physical Hazards: Involve physical characteristics such as type of construction, location, occupancy of building, having frayed wires on plugs, steep stairs with no railing, or smoking in bed.
2. Moral Hazards: Involve dishonest tendency such as exaggerating losses in a theft claim or auto insurance fraud (e.g., two cars intentionally bump each other with many passengers claiming injury).
3. Morale Hazards: Involve an increase in losses due to knowledge of insurance coverage such as having a different attitude toward a loss because the loss will be covered by an insurance company (e.g., leaving a car unlocked, ordering unnecessary medical tests, or a jury’s tendency to grant larger amounts of money in situations where an insurer will have to pay).
4. Legal Hazards: Involve increased frequency and severity of losses such as legislative action (e.g., ADA requirements or mandated insurance coverages).
Exam Tip: It is important to distinguish between a peril and a hazard. As we’ve mentioned, the peril is the occurrance for which we insure. There are circumstances that are often controllable by an insured, that increase the likelihood of loss but are not the specific cause of the loss. These circumstances are called hazards.
Define Speculative Risks
Speculative risk refers to those exposures to price change that may result in gain or loss.
Most investments, including stock market investments, are classified as speculative risks. Other speculative risks result from the potential gains or losses associated with interest rate changes, price movements of foreign currencies, and price movements of agricultural and other commodities. With speculative risk, the risk is man-made and did not exist naturally. The individual’s goal is not merely to avoid loss, but rather to create risk in the hopes of actually gaining. Since insurance deals with pure risk that exists only when a chance of loss/no loss is possible, man-made speculative risks such as the stock market and gambling are not suitable for coverage.
Pure Risk + Speculative Risk = Risk
Practitioner Advice: Often clients say they don’t believe in buying insurance because they feel it is a “gamble.” This is odd, considering insurers do not take on speculative risk. When people say they won’t buy disability insurance because they have to become disabled in order to “win,” they miss the point of insurance. The risk of disability already exists whether you purchase insurance or not. You either can become disabled or not; there is no gain potential in becoming healthier because you have a policy. On the other hand, when you bet $100 in hopes of winning $1,000 if your favorite football team wins the Super Bowl, your chance of loss or gain did not exist prior to your bet. You created this risk.
Define Adverse Selection
When one party to a transaction has more relevant information or more control of outcomes than another party to the transaction, the party with superior information or control can take advantage of the situation. Insurance scholars call this possession of asymmetric information adverse selection.
Adverse selection is also defined as the actions of individuals acting for themselves or others, who are motivated directly or indirectly to take financial advantage of a risk classification system. For example, adverse selection occurs when people who know their health is deteriorating try to purchase health insurance to cover the cost of a needed operation. Another example would involve a person trying to purchase fire insurance immediately after an arsonist threatened his property.
The reason the term is called adverse selection is because the insurer is trying to select suitable people for coverage from an applicant pool that really doesn’t represent a fair cross-section of the population. This is because those at risk tend to apply in greater proportion to those who are at lower risk. Thus, there is a tendency to select for coverage a higher percentage of adverse candidates.
**Practitioner Advice: Though many new life and health insurance agents get very excited when they receive an unsolicited request to purchase an insurance policy, most seasoned agents remain cautious. Experience shows that such inquiries usually come with a higher risk of adverse selection. It is important to ask these individuals appropriate questions to properly assess their situations. More times than not, an agent will discover that the potential client was compelled into action due to a known change to his or her health.
**
Exam Tip: Adverse selection represents a real risk to an insurance company. Beyond knowing the definition of adverse selection, work towards recognizing a scenario where adverse selection could be present for an insurer.
Define Risk Retention
Risk retention means retaining or bearing the risk personally. Retention is the most common approach to risk because it is the default strategy - not taking any action to transfer a risk means it is retained. Since people are not always aware of the risks they face, much of the retention is done unconsciously and unintentionally.
Risk Retention Example:
A person who retains any income losses caused by a disability is experiencing risk retention.
Exam Tip: Use the matrix below to determine the best risk management approach based on the potential cost of loss and probability of occurrence.
* Low cost, low prob - Risk Retention
* Low cost, high prob - Risk Reduction
* High cost, low prob - Risk transfer
* High cost, high prob - Risk Avoidance
Lesson 2. Evaluation and Analysis of Risk Exposures
Course 2. Insurance Planning
Describe Identify and Measure Loss Exposures in the Risk Management Plan
All exposure to loss should be identified and measured. Written decisions, legal documents (such as wills), and other valuable papers should be maintained in a secure place. In most cases, an adequate amount of insurance should be purchased after utilizing all reasonable risk avoidance and reduction alternatives.
Practitioner Advice: Risk retention is the most common approach to risk, as it includes risks that are unconsciously and/or involuntarily retained. For example, putting a trampoline in your backyard and letting the neighbors’ children use it greatly increases the risk of injury and a resulting claim against your homeowners insurance. Unemployment is a risk that you cannot completely transfer; therefore, you have no choice but to retain that risk.
Describe Regular Review of Risk Management Plan
Finally, the program should be reviewed on a regular basis. The scientific approach to the loss exposure problem is essential to individuals and families in today’s complex and changing financial environment. As situations change, adjustments to the plan may be necessary.
For example, you should monitor the cost associated with your risk management program, also known as risk administration. Risk administration includes costs such as the premiums you pay, as well as the time you spend analyzing your risk situation. As time goes by, the cost associated with your risk management program may prompt you to reevaluate your implementation strategy.
Practitioner Advice: Whenever you have a significant or “life-changing” event, you should review your Risk Management Plan. Events like marriage, divorce, having a baby, or your last child graduating from college are all reasons to sit down and look at your risk exposures and how you are handling them as they work to uphold the high standards represented by CFP® certification.
Define Direct and Indirect Property Losses
Direct property losses are frequently caused by perils including fire, theft and windstorm damage.
Indirect property losses include temporary housing expenditures during a period when a home is rebuilt after a fire and car rental expenses after a vehicle has been wrecked or stolen. Most property, real and personal, is insured, with a homeowner’s insurance policy. This type of policy also provides some income reimbursement and liability coverage, and can be quite flexible when endorsements for special situations are attached to the basic policy.
Practitioner Advice: If your client is a tenant, it is important to encourage them to purchase Renter’s Insurance, a very inexpensive form of homeowner’s coverage. In addition to covering clothes and furniture, Renter’s Insurance also provides liability protection.
Describe Business Direct Property Losses
Risk managers can identify potential direct property losses in different ways. A walking tour of a factory, store, or hospital can reveal many property loss exposures. Risk managers often arrange regular interviews with knowledgeable employees, such as the production manager or accountant, to identify significant changes in property holdings.
The risk management procedures manual should establish a system for notifying the risk management department when property is acquired or sold. An analysis of financial statements, as well as the supporting accounts, can highlight assets exposed to loss, as can an analysis of past losses.
Practitioner Advice: Most insurance companies that offer workers compensation and other business-related policies will do a site visit and make suggestions on how to prevent losses, as well as how to reduce the impact of any losses.
Describe a Business’ Loss of Key Personnel
If a business loses a key person due to unplanned retirement, resignation, death, or disability, the effect may manifest in lost income. If several key employees die, are disabled, or leave simultaneously, the results could devastate a firm. When the success of a business- or, in some instances, its very existence -depends on one or more persons, the risk manager must identify these people and be ready to take steps to solve the problem if a loss occurs.
Part of identifying the key-employee exposure is developing an estimate of where, at what cost, and how quickly a replacement may be hired and trained. The cost of the replacement would give the firm an estimate of the value of its exposure to loss.
Key employees should have well-trained subordinates when this is possible. Key personnel may be identified using an organizational chart or a flow chart.
Estimating the cost of key-employee losses is difficult because finding and training a replacement is a function of the job market.
Practitioner Advice: Once key employees are identified, life insurance should be considered for them. In a Key Person policy, the business pays the premiums and receives the death benefits. These funds can then be used to recruit and train a new person, as well as cover the income lost due to an employee’s untimely death.
Define and describe Vicarious Liability
Courts can also impose liability for the negligent acts of other parties.
Vicarious Liability Example:
Assume Michael Anthony loans his car to Julien Alexander, who causes an accident. Michael might be held liable if it can be shown he was negligent in lending his car to someone he knew or should have known was a poor driver.
Exam Tip: It is important to understand that the negligence of another could create a potential liability. A vicarious liability may occur between employer-employee, or even a parent and child. In other words, vicarious liability can arise for people or organizations, when parties they hire as contractors (or subcontractors) injure others.
Audio:
* Vicarious liability – one party held liable for the negligence of another party
* Understand the definition and recognize examples
* Employer held liable for the actions of an employee
* Construction held liable for the negligence of a sub-contractor
* Parent is held liable for the action of a dependent child
Describe Punitive Damages
Punitive damages are awards made to plaintiffs not as compensation for injuries suffered, but as a means of punishing defendants for outrageously offensive acts. What constitutes such an act is a question of fact. The insurer usually agrees to pay for injuries inflicted by negligence on behalf of the insured individual. Punitive damages usually imply gross negligence, something for which the insurer may not have contemplated making payment.
Also, punishing an insurance company may not satisfy the courts’ purpose of punishing wrongdoers. Thus, in a few states, state law prevents insurers from providing compensation for punitive damages. If insurance frustrates public policy, an event becomes uninsurable.
Exam Tip: Differentiating compensatory damages from punitive damages from a tax perspective is essential. Basically, proceeds from compensatory damages will be excluded from gross income, while any awards stemming form punitive damages are always included in gross income.
Audio:
* Compensatory damages (not taxable) – make the plaintiff whole, bring them back where they were
* Punitive damages (taxable to the recipient) – punish the defendant for the wrong doing; usually associated with very gross negligence
Lesson 3. Legal Aspects of Insurance
Course 2. Insurance Planning
Describe Conditional Receipt
and Errors & Omissions Insurance
A conditional receipt can provide temporary coverage, contingent on an applicant’s ability to present evidence of insurability.
Life insurance agents give applicants a conditional receipt when the applicants submit a premium payment with the application. With one common type of conditional receipt, if evidence of insurability exists, coverage begins from the date of the receipt. Evidence of insurability always includes, but is not limited to, good health. Occupation would be another factor.
Practitioner Advice: The conditional receipt affords the life insurance applicant temporary coverage during the underwriting process. Agents should always encourage an applicant to submit an initial premium payment with the application in order to receive such a receipt. If the agent does not educate the applicant of this when a conditional receipt is available, and the applicant dies in an accident after all medical testing had been completed, the agent could be sued by the deceased applicant’s heirs for failure to provide advice that is expected of a licensed professional. Such mistakes of agents are why errors & omissions insurance exists and should be maintained.
Define Unilateral and Bilateral Contracts
In unilateral contracts, only one party makes an enforceable promise. Insurance contracts are unilateral in that only the insurer makes a binding promise. The insured can cancel the policy at any time without recourse, while the insurer is limited to specific situations (such as failure of the insured to pay premiums) when it may cancel a policy. The insured does not promise to pay the premiums and cannot be sued for failure to do so. Insureds cannot collect for losses if they do not pay premiums, because timely payment of the premium is a condition of the contract.
Contracts in which both parties make enforceable promises are called bilateral contracts.
Insurance is not considered a bilateral contract.
Practitioner Advice: The most popular term insurance policies these days are those that come with a premium guarantee period, for example, 20-year level term. The insurance company is committed to honoring the contract and not raising the premium for 20 years. The policyholder however, is not committed to keeping the policy for 20 years, and can cancel at any time.
Describe Life Insurance
In life insurance, the policy owner must show a recognized interest in having the insured’s life continue. This interest must be shown when the policy is purchased. People are presumed to have an unlimited insurable interest in their own lives and may purchase any amount of insurance on their own lives that an insurer will issue. The law presumes a husband and wife have an unlimited interest in each other’s life. Beyond close family relationships, an insurable interest must be demonstrated. Interests that generally can be demonstrated include creditors in the lives of their debtors, partners in each other’s lives, and employers in the lives of their key employees.
Exam Tip:
A life insurance policy owner must have insurable interest in the insured’s life when a policy is purchased (inception of the policy). The interest does not have to exist at the insured’s death.
On the other hand, an owner of a property & casualty (P & C) policy must have insurable interest at the time of purchase AND at the time of loss.
Audio:.
* .Ex. Employer purchased life insurance on a key employee. If they leave, technically, company can continue to pay premiums and collect when key employee dies.
Describe Owner in Contract
It is the applicant who must demonstrate the insurable interest at the time of application. The insurer needs to know that the person who will be receiving the death benefit has an adequate relationship to the person being insured.
The owner of the policy is the party who can enforce the contractual rights such as naming the beneficiary, assigning the policy, taking out loans from the insurer, and designating the dividend options.
Practitioner Advice: In most situations, the person being insured will be the owner of the contract. For estate planning purposes, a spouse or a trust may be the owner. In business situations, the company or the partners could be the owner of the life insurance. contract.
Exam Tip: Beware of contract titling that places different individuals as the owner, insured, and beneficiary. For example, a life insurance contract on which one parent is the owner, the other parent is the insured, and the child is the beneficiary. This creates circumstances where a gift is made to the child from the surviving parent.
Audio:
* Review life insurance policies to see who is the owner, insured, and beneficiary.
* Avoid “the unholy triangle”. Three different parties: owner, insured, and beneficiary.
* At the death of the insured, the owner is deemed to have made a gift to the beneficiary in the amount of the life insurance proceeds. Significant gfit tax for large policies.
Describe Beneficiary in a Life Insurance Contract
The beneficiary is the party receiving the funds at the insured’s death. It is the beneficiary who must demonstrate the insurable interest at the time of application. The insurer needs to know that the person who will be receiving the death benefit has an adequate relationship to the person being insured.
Insurable Interest Beneficiaries Example:
* Insurable interest is commonly assumed for immediate family members such as a spouse, children, or grandchildren.
* Conversely, insurable interest would be needed from a beneficiary if he or she were an extended family member (e.g., second cousin), friend, or co-worker.
Practitioner Advice: Most often, the primary beneficiary is the spouse. Some divorce agreements now require that life insurance be maintained to provide for the children, naming the ex-spouse as beneficiary for the benefit of the children. To minimize estate taxes, the insured’s estate should not be named as beneficiary
Define Subrogation
Subrogation is the legal substitution of one person in another’s place. Subrogation is supported by the theory that if a person must pay a debt for which another is liable, such payment should give the person a right to collect the debt from the liable party.
Subrogation prevents insureds from profiting on their insurance by collecting twice for the same loss. Subrogation also prevents negligent parties from escaping payment for their acts.
**Exam Tip: In insurance, subrogation gives the insurer the right to collect from a third party after paying its insured’s claim. A typical case of subrogation arises in automobile insurance collision claims.
Audio:
Insured gives subrogation rights to the insurance company
Ex. In an automobile accident and you’re not at fault. Your insurance company pays for damages.
Subrogation rights in the contract give the insurance company the right to seek collection from the negligent party that caused the accident. **
Lesson 5. General Business Liability
Course 2. Insurance Planning
Describe Professional Liability Insurance
Professional liability is caused by errors of professionals. Such insurance typically commits an insurer to pay all sums subject to policy limitations that the insured becomes legally obligated to pay as damages resulting from providing or failing to provide professional services.
There are several types of professional liability insurance. See below for the most common types:
* Medical Malpractice Insurance: Covers health-related harm by a medical professional (e.g., Dr., RN, PA, DMD).
* Legal Malpractice Insurance: Covers litigation-related harm caused by failure of a legal professional to uphold the standards of ethical conduct.
* Errors & Omissions Insurance (E&O): Covers financial-harm facilitated by a professional that deals with client’s money (e.g., CFP®, CPA, CPWA).
In general, most professional liability policies do not give the insurer the right to settle suits without the insured’s consent. The reason is that the professional’s reputation and future earnings could be affected adversely by settlement of negligence claims even though sometimes it might be expedient for the insurer to offer a settlement. However, most of the newer professional liability policies have removed a previous requirement that the insurer obtain the consent of the insured before making an out-of-court settlement, to protect the insured’s professional reputation.
Practitioner Advice: As a financial professional, whether an insurance agent, financial planner, or other licensed advisor to the public, you will face liability risk to your clients. Errors & Omissions (E&O) insurance is a necessary coverage in any advisor’s personal risk management plan. Most professional associations offer E&O coverage to members at a reasonable cost.
Audio:
Describe Directors and Officers Liability Insurance
Director and Officers Liability Insurance (D&O) covers Directors of corporations and other organizations.
* It is necessary when to guarantee protection of individual serving on boards of directors.
In the absence of this coverage, board members might find their personal assets subject to liability claims, or might find they had to finance a legal defense of their alleged malfeasance from their own resources.
Exam Tip: Listen in for an overview of the common testing applicaiton of Directors & Officers Liability Insurance.
Audio:
* Person serving on the board of directors of a company - concerned for exposure from the role.
Would recommend Directors & Officers Liability Insurance.
Describe Errors & Omissions Insurance
Many professionals, such as real estate agents, insurance agents, accountants and architects, need this type of liability protection to cover clients’ claims alleging professional negligence.
Practitioner Advice: Errors & Omissions Insurance covers unintentional oversights by a planner that adversely impact a client’s financial circumstances. Though there may be certain policy exclusions (e.g., alternative investment products, private securities transactions, Regulation D offerings), E&O insurance is recommended for practitioners. The National Association of Professional Advisors (NAPA) provides E&O coverage options for several types of financial planning entities, including: Individual RIAs, RIA Firms & LLCs, and Registered Representatives. By joining the Financial Planning Association (FPA), membership benefits include preferred E&O coverage rates.
Lesson 4. Property and Casualty Insurance
Course 2. Insurance Planning
List the ISO Forms and their Coverages
- HO-2 Broad Dwelling and structures: Named peril; Contents coverage up to 50% of dwelling coverage.
- HO-3 Special Losses are covered unless specifically excluded. Dwelling and structures: Open peril; Contents coverage up to 50% of dwelling coverage.
- HO-4 Contents Broad Covers contents and personal liability of renters. No coverage on dwelling and other structures.
- HO-5 Comprehensive Losses are covered unless specifically excluded. Open perils coverage on dwelling, structures, and contents.
- HO-6 Unit Owners Property interest, contents, and personal liability of people owning a unit in a condominium or co-op.
- HO-8 Modified Homes having a replacement cost greater than FMV. Typically, historic homes.
Exam Tip: Work toward memorizing the type of residence that is covered by each homeowners form and the extent of the included coverage. For example, single-family, residential homes are covered by HO-2, HO-3, and HO-5 forms. The higher the number of these forms, the greater the extent of the coverage.
Audio:
6 types of homeowner’s or residential types of insurance
* HO-2, HO-3, and HO-5 forms - covers traditional single-family, residential homes
* HO-3 - open perils coverage for the dwelling, but** broad form coverage for contents**
* HO-5 - open perils coverage for the dwelling and the contents
* HO-4 - for renter’s personal belongings; the contents and some liability coverage
* HO-6 - for condominium owners, wall studs in, contents and liability
* HO-8 - historic homes (150yo home), replacement value would be so high that no insurer would be comfortable insuring it on a replacement basis
Describe Sections One and Two of HO insurance
Section One (Property) of the HO consists of the following parts:
* Coverage A: Dwelling
* Coverage B: Other Structures (typically limited to 10% of Coverage A)
* Coverage C: Personal Property (typically limited to 50% of Coverage A)
* Coverage D: Loss of Use (typically limited to 20% of Coverage A)
Section Two (Liability) of the HO consists of the following parts:
* Coverage E: Personal Liability
* Coverage F: Medical Payments to others
* Homeowner Insurance
Exam Tip: Homeowners insurance policies are split into two major sections, Section 1, which provides insurance protection on the homeowners property, and Section 2, which provides liability coverage. Listen in for important exam-related information on the separate coverages within each Section.
Audio:
* Important to know which section coverages what
* A - for “address” - dwelling itself
* B - for the barn out back, “backyard”, shed, fence (10% of A)
* C - “contents - clothing, couch, curtains” personal property (50% of A)
* D - “displacement”, fire in the home and uninhabitable while being (20% of A) replaced/repairs
* Notice for B, C and D - all have maximum limits that pertain to Coverage A Dwelling.
* Section 2
* E - personal liability “exposure to legal damages”
* F - “funding for medical fees for others that might have been hurt on property”
Describe Dwelling Insurance
Dwelling comes under Coverage A of Section 1 that provides property insurance protection. Coverage A insures the dwelling and all attached structures (such as an attached carport or deck) of the insured person.
Coverage A applies to the insured’s residence premises shown on the declarations. A second home or summer cottage, which might be considered a temporary residence, is not covered because it does not appear in the declarations and should be covered under a policy specific to that property.
Practitioner Advice: The rule of property insurance is that if you can get insurance for the property on its own, it isn’t going to be covered under another property’s policy. What this means is, if you own a rental property, which is separate from your primary residence, it is not covered under your homeowner’s policy. This is because specific policies exist for non-owner occupied dwellings (Dwelling Fire Policies), which are more suitable for covering that type of risk. The same goes for your car. Since it should be insured under an auto policy, it is not covered under your homeowner’s policy even if destroyed while in your garage.
The limits of coverage for the various insuring agreements found in Section 1 are determined as a percentage of Coverage A. If an insured needs additional protection, coverages B, C, or D may be increased. Coverage may not be reduced below the specified percentages. The insured must pay an additional charge for increased coverage.
Describe Special Limits of Liability
The special limits of liability section of an insurance policy establishes the maximum dollar amounts that an insured can recover when the specifically identified property is damaged or stolen.
In addition, some types of property, such as jewelry (limited to $1500 on homeowners), can be covered on a Scheduled Personal Property Endorsement. Its purpose is to provide open-perils coverage for specific items at higher amounts of coverage. For example, boats and their trailers are only protected up to $1500, so boats of higher value need to be insured separately. Silverware and gun collections are each limited to $2500, and the coverage is only for theft, not for loss.
Practitioner Advice: Valuable possessions like jewelry, fur, etc. that are worth more than the policy limit should be listed on a separate Scheduled Personal Property Endorsement. Other personal items such as cameras, musical instruments, fine arts and antiques, and stamp and coin collections can be covered as well, with the exception of fishing and hunting equipment. With a Scheduled Personal Property Endorsement not only can the amount of coverage be increased, but also the items are covered if they are misplaced or if the diamond falls out of a ring and is lost. There is an additional premium for this protection, and it typically requires having the items professionally appraised.
Describe Personal Liability under HO Insurance
Personal Liability comes under Coverage E of Section 2 and covers the obligations of the insured due to their negligence. The policy will pay up to the stated policy limits for legal obligations of the insured due to bodily injury or property damage.
In addition, the insurer will pay for the legal defense costs, as long as it is a type of liability covered under the homeowner’s policy.
As with all insurance policies, there are some exclusions listed in the policy. For example, professional liability and motor vehicle liability are both excluded and should be insured elsewhere, e.g. through Malpractice insurance and Auto insurance. Aircraft liability and use of watercraft powered with inboard or inboard-outdrive motors are not covered.
The standard coverage limit is $100,000, most agents recommend carrying at least $500,000.
Exam Tip: Section 2, Coverage E of a homeowners policy provides the residents of a covered abode with a minimum of $100,000 of personal liability coverage. Since one may be personally liable for large amounts as a result of litigation, this coverage serves as a baseline for protection. Listen in to find out how this coverage may coordinate with other liability insurance.
Audio:
* Coverage E of a homeowner’s policy does not pertain to damage to the household, dwelling or personal property
* It is personal liability insurance
* Would help pay expense for someone seeking damages for an injury while a guest at your home. If they file a lawsuit and seek significant damages. If awarded, personal liability section can pay up to the policy limit.
* Not uncommon to see minimum of $100k to several hundred thousand.
* Would be wise to place a personal liability umbrella on top of the HO policy
Practitioner Advice: Most people who own homes are required to carry Homeowners insurance because they have a mortgage. Renters and Condominium owners often don’t bother with insurance, thinking they don’t have much in valuable furnishings. They are unconsciously retaining the liability risks of someone getting hurt in their apartment. The Renters Coverage (HO-4), or Condominium Owners (HO-6) is one of the least expensive types of insurance, costing less than $200 a year in Massachusetts.
Describe Conditions associated with replacing loss
The settlement of covered property losses is detailed below.
Loss of the following types of property is settled at actual cash value at the time of loss but not more than the amount required to repair or replace it based on the depreciated value at the time of loss:
* Personal property
* Awning, carpeting, household appliances, outdoor antennas and outdoor equipment, whether or not attached to buildings
* Structures that are not buildings
Practitioner Advice: For an additional cost, usually about 25% of the base premium, an insured may choose to purchase Replacement Cost coverage on their personal property. If this coverage is in place, any items will be replaced at current fair market replacement value rather than depreciated value should a covered loss occur.
Mini Bite: Homeowners Insurance Coinsurance Clause
What is the formula for and describe Coinsurance clause?
https://www.youtube.com/watch?v=3XC6OHI7oMk
In this 5-minute video, Mike explains a key aspect of homeowner’s insurance, the coinsurance clause. Understanding the coinsurance clause enables the planner to assist clients with decisions regarding adequate levels of homeowner’s insurance dwelling coverage.
Coinsurance clause – dwelling coverage be maintained at a certain minimum percentage of the home’s replacement cost in order for a partial loss on the dwelling to be covered in full
Coinsurance application = ( Insurance Limit / Required % x Replacement Cost ) x Loss - Deductible
- Insurance Limit / Required % x Replacement Cost = ( DID HAVE / SHOULD HAVE)
- Health insurance: deductible comes off the top.
- In HO policy, deductible comes out the back end.
- What advice would you give client?
- At a minimum, recommend client to carry 80% of $500k
- Insurance is never going to pay more than the policy limit
- So best advice is to maintain coverage limit of the full replacement value.
- That way in the event of a total loss, it would have $500k of coverage. If only had $400k required coinsurance application, wouldn’t have full coverage.
Practitioner Advice:
Describe PAP Coverage requirements
Practitioner Advice:
The insured does not have to purchase either coverage. However, if they have a car loan the lender will require both coverages within certain deductible limits until the loan is paid. This protects the collateral for the loan, which is the vehicle itself.
Lists the four categories of insureds PAP provides coverage for
The PAP provides coverage for four categories of insureds that have potential liability arising from the use of an auto.
Category 1: The named insured and resident family members are covered for the ownership, maintenance, or use of any auto, whether it is owned or borrowed, unless an exclusion applies.
Practitioner Advice: In some states, such as Massachusetts, all licensed family members living in the same home as the insured must be identified and listed on the policy, whether or not they have their own policy. If a loss occurs due to a licensed family member’s driving and the family member was not listed on the policy and does not have their own policy, the claim will be denied. This is to combat fraud, where a risky family member is unknown to the insurer, thus the premiums charged are less than what should have been assessed for the risk. Of course, if the household member is covered by another policy, merely listing them as a licensed household driver will not impact the insured’s premiums. It is only when such a household driver does not have other coverage that their driving record will impact the insured’s premiums.
Category 2: Covers any person using the named insured’s covered auto. That is, the car owner’s insurance, not the driver’s insurance, would pay a claim if the owner let somebody borrow his or her auto.
Categories 3 and 4: In some situations, people or organizations other than a driver can be sued due to a driver’s negligence. In some of these instances, the PAP will cover the liability of these people. For example, assume that the Alpha Beta Gamma Omega fraternity sends a brother, Bozo, to get some refreshments for a “party.” Assume that Bozo uses his own auto. If an accident results during the shopping trip, the PAP would cover the fraternity’s liability in this suit. The fraternity’s liability arises because Bozo was technically an agent of the fraternity while on this mission. The difference between Categories 3 and 4 is between the insured driving an owned or a nonowned vehicle.
Describe Auto Collision vs. Comprehensive
Collision means collision (violent striking) of an automobile with another object (a car, a tree, or even standing water). The word “object” is quite broad and includes almost anything that can be seen or felt. However, the collision must occur while the car is being operated.
Losses clearly not caused by collision include theft, vandalism, fire and windstorm. For example, an unoccupied car sitting in a driveway that has a tree fall on top of it is not involved in a collision.
As might be expected, gray areas exist. Automobile policies providing collision and non-collision coverage deal with these questions by including wording such as the following: “For the purpose of this coverage breakage of glass and loss caused by missile, falling objects, fire, theft or larceny, explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, riot or civil commotion, or colliding with a bird or animal shall not be deemed to be loss caused by collision.”
It makes a difference if a loss is a collision or not. Frequently, different loss settlement provisions, such as the dollar amount deducted from the loss before the insurer must pay, make this distinction important. The distinction would also be important if one or the other but not both of the coverages were purchased.
Exam Tip: As far as Personal Automobile Policy Collision and Comprehensive coverages are concerned, on the CFP exam “know the difference, score the points!”
Practitioner Advice: While discussing the difference between collision and non-collision (comprehensive) coverage, a popular personal auto policy subject comes to mind. “Do I really need to purchase insurance when I rent a car?” The answer depends on the definition in your auto policy. For example, most auto policies extend collision coverage to a rental car. The reasoning is you can only be driving one car at a time, so while driving the rental, they aren’t covering your car against collision.
However, as for comprehensive coverage (theft or damage caused by everything but a collision), the rental car may only be covered if the insured’s vehicle is parked at the normal place of garaging. To the insurer, leaving your car at the airport parking lot while on you are on vacation creates an unfair situation. The insurer is still protecting your car from a comprehensive loss when you also seek the same coverage on the rental. The insurer doesn’t want to be covering two cars for the price of one at the same time. So, when deciding whether or not to purchase coverage for a rental car, know your policy’s definitions.
Audio:
Understand the difference between auto collision and comprehensive
Collision - when our automobile strikes another object (car, tree, light pole, typically inanimate)
Comprehensive - theft, fire, striking an animal
Describe Umbrella Liability
Because of the increasing size of settlements and jury awards in lawsuits, insurance companies developed an additional level of liability protection. Typically referred to as Personal Liability Umbrella Policy because it “sits on top of” underlying policies, the limit can range from $1 million to $10 million. Whether the claim is from general liability or auto-related, the Umbrella policy steps in when the basic policy has reached its maximum claim limits. In addition to providing excess coverage for claims, the umbrella policy offers broader coverage, for example, driving anywhere in the world is covered, rather than restricted to the U.S. and Canada.
A Personal Liability Umbrella Policy will also provide coverage for some exposures that are not covered by the insured’s basic coverage. A deductible or self insured retention is typically applied when the loss is covered by the umbrella coverage but is not covered by the basic contract or contracts.
Practitioner Advice: While high net worth clients need Umbrella policies due to their higher risk of being sued, many other clients could benefit from this inexpensive protection. Anyone with young drivers in the household, people who travel and drive internationally and those with higher risks like swimming pools and trampolines should learn more about the costs and benefits of this policy.
Audio:
* One of the greatest tools - umbrella policy
* Huge cushion of liability protection
* Inexpensive way to get significant additional liability protection
* Good for young drivers, swimming pool, trampoline
* Can get $1 million for $300-400
* Each additional million is less expensive
* Can get comprehensive coverage for your client through the use of umbrella policies
Exam Tip: A Personal Liability Umbrella function is just as it reads, it is like an umbrella, offering additional protection above and beyond the base limits of the liability sections of the personal automobile policy (PAP) (i.e., Part A) and homeowners policy (i.e., Coverage E).
Describe Transportation Insurance
The perils facing mobile property are broader in scope than the perils facing real property. In addition to such perils as fire, lightning, and windstorm, mobile property may be sunk, confiscated, and hijacked as well as collided with and stolen more easily than property attached to the land.
The broader scope of the perils, the difference in ability to investigate losses, and the differing potential for salvage operations have resulted in marine insurance practices that are quite distinct from comparable property insurance practices.
Mobile property, such as property to be exported, is generally covered by transportation insurance.
Inland marine insurance is essentially an American distinction. Other countries have not separated the underwriting powers of insurers to the extent Americans have. In the United States, the distinction between inland marine insurance and ocean marine insurance still remains because of separation of underwriting powers.
Exam Tip: Inland Marine Insurance coverage is a type of transportation policy that applies to any personal property items that are not attached to a structure and can be moved from one location to another. While a custom decorative rug from Morocco would qualify (it can be rolled-up and transported) installed carpeting does not (it is attached to the housing structure). Listen in for additional facts about Inland Marine Insurance coverage.
Audio:
* Commercial property and casualty insurance is not a big part of exam
* But may see question on Inland Marine Insurance (which has nothing to do with the ocean)
* It’s special insurance to cover equipment or materials, products that are shipping over land (by truck or train)
Lesson 6. Health Insurance
Course 2. Insurance Planning
Describe the Deductible Provision
Major medical policies cause an insured to pay an amount of medical bills equal to a substantial deductible. This deductible lowers the insurer’s costs since the first dollars of all losses are not covered.
In marginal cases where treatment may not be necessary, the insured has a strong incentive to avoid overuse of medical care. Some policies apply the deductible to each illness or accident, but limit the total amount deducted to some annual maximum.
Practitioner Advice: Remember, deductibles are a form of risk retention on the part of the insured. When an insured selects a higher deductible, the insurer does not have to provide coverage as soon, thus saving the insurer money. Insurers pass along some of these savings to those insured’s who choose higher deductibles in the form of lower premiums.
* The opposite, however, is also true. A lower deductible increases insurer cost, thus comes at a higher premium to the insured.
* So, when selecting the proper deductible, the insured must balance risk tolerance (based on probability, frequency, and severity of loss) with affordability.
Describe Participation Provision
With a major medical policy, the insurer agrees to pay a specified percentage of the insured’s bills and the insured must pay the difference. This sharing of costs is called the participation provision, or coinsurance. Typically, the insurer pays 75% to 80% of the bills after the deductible requirement is met. The insured pays the remaining 20% or 25%.
As with deductibles, the amount of coinsurance that the insured shares beyond the deductible is another form of risk retention. The more the insured shares, the lower the premium; the less shared, the higher the premium.
Exam Tip: The CFP Exam often tests concepts and definitions at the level of application by presenting a real-life scenarios. Health Insurance coverage provisions are commonly tested in this manner. Specifically, CFP Board may present a scenario in which the Health Insurance policy benefits will be accessed and ask the candidate to calculate the amounts paid by the insured and/or insurer. To do so with precision first requires an understanding of the core policy provisions and definitions (i.e., deductible, coinsurance provision, stop-loss, and maximum-out-of-pocket).
Listen in below for a comparison of stop-loss limits and maximum-out-of-pocket provisions.
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* A major medical policy has a deductible. Benefits don’t kick in until deductible has been met.
* After deductible is met, coinsurance kicks in (insurance may pay 80% and insured pays 20%)
* Stop-loss limits - the maximum amount of covered charges after the deductible has been paid to which the coinsurance provision applies.
* Ex. $1000 deductible. Stop-loss limit of $10,000. Insured will pay first $1000 (deductible). Then will pay 20% of the next $10,000 in eligible charges (insurance pays 80%).
* Total exposure is the sum of the two: deductible and coinsurance, which is Maximum-out-of-pocket provisions (MOOP).
Describe the parts of Medicare
Medicare is health insurance for people age 65 or older, under 65 with certain disabilities, and individuals of any age with End-Stage Renal Disease which is permanent kidney failure requiring dialysis or a kidney transplant. The cost for Medicare will vary depending on the plan, coverage, and services used.
Most people get their Medicare health coverage in one of two ways, the original Medicare Plan or the Medicare Advantage plans like HMO’s and PPO’s which is called Part C.
The original Medicare Plan provides Part A (Hospital Insurance) and optional coverage for Part B (Medical Insurance), Part D (Prescription Drug coverage), and Medigap (Medicare Supplement Insurance) Policy. Most people are eligible for Part A coverage without having to pay a monthly payment/premium if they or a spouse paid enough Medicare taxes while working. If someone does not qualify for premium-free Part A they may be able to buy it, but they may have to enroll in Part B and pay a premium for it too.
Medicare Part A helps cover inpatient care in hospitals, including critical access hospitals and skilled nursing facilities, but not custodial or long term care. If you meet certain conditions it may cover hospice care and home health care as well.
Medicare Part B helps pay for medical services like doctors’ services, outpatient care, and other medical services that Part A doesn’t cover. Part B helps pay for covered medical services and items when they are medically necessary and some preventive services. Most people will pay the standard monthly Part B premium. However, as of January 1, 2007 the Part B premium is based on modified adjusted gross income once annual income exceeds a certain amount.
Medicare Part C alternative combines Part A (Hospital Insurance) and Part B (Medical Insurance). Most Part C plans cover prescription drugs. If it does not, then it may be possible to purchase Part D (Prescription Drug Coverage).
Medicare Part D (Prescription Drug Coverage) is available through private companies that work with Medicare to provide prescription coverage. There are different types of Drug Plans. Once enrolled in a plan you may switch plans from November 15-December 31 of each year. In most cases a separate monthly premium is paid. Premiums vary by plan. If you decide not to enroll in a Medicare drug plan when you are first eligible you may pay a penalty if you choose to join later. A co-payment or coinsurance, and in some cases, an annual deductible will also need to be paid. Prescriptions are filled with pharmacies that have contracts with Medicare.
Exam Tip: To score Medicare-related CFP exam points, know your ‘A-B-C-D’s!’ Each Part of Medicare has important characteristics, worthy of study, memorization, and practice. Listen in for an overview of each Medicare Parts in which key information is pointed out and examined.
Audio:
* Know the structure of Medicare and what is covered under the respective parts.
* A - hospitalizations - paid for during our working years.
* B - optional, but nearly everyone enrolls in part B (doctors, labs, radiology) - monthly premium based on income.
* C - alternative - HMO option, cost effective
* D - prescription Drugs - newest of the medicare coverages. Forever in a constant state of change.
Practitioner Advice: Your clients who are enrolled in Medicare can register at my.medicare.gov for information about their health claims, preventative services, and how to get the most out of their Medicare benefits. They can also call 1-800-MEDICARE for information.
What is the patient’s share of Medicare cost?
The patient’s share of Medicare cost is subject to change each year. To illustrate just one gap in Medicare coverage, consider inpatient hospital care.
Medicare Part A Costs Example:
In 2023, the patient is responsible for a one-time deductible of $1,600 for hospital stays for the first 60 days. For longer hospital stays, the patient’s co-payment increases to $400 each day for stays between 61 and 90 days. Finally, Medicare charges a co-payment of $800 each day for additional days taken from the 60-day reserve that a patient can only use once in his or her lifetime.
Moreover, other co-payments apply to such things as short-term stays in nursing homes and to certain charges by physicians and other service providers. Therefore, the great majority of Medicare beneficiaries have also purchased Medigap coverage. In recent years, more than 70% of the people enrolled under Medicare purchased some form of Medicare gap-filling coverage. Just 25 insurers earned almost 70% of the Medigap premiums.
Practitioner Advice: Understanding Medicare enrollment timeframes and associated costs can serve as a ‘value-add’ to your clients. The Medicare system is complex and navigating the process can be overwhelming for clients. Check out medicare.gov to view the current Medicare pricing on an annual basis and upon significant legislative changes.
Describe the Types of HMO Contracts
HMOs are organized in two different types:
* Individual practice HMO, and
* Group practice HMO.
The individual practice HMO contracts with specific physicians and hospitals. These doctors and hospitals may provide service to the public in addition to members of other HMOs. Participants in the individual practice HMOs can choose a physician from among those participating in the plan. The physician then charges the HMO a fee for each patient seen.
The group practice HMO has a limited number of medical providers that a member may use. These doctors and medical professionals often work exclusively for the HMO.
Practitioner Advice: If your clients are considering changing health insurance plans, either individually or through their employer, you should check to see if the client’s current doctors are included in the HMO plan(s) up for consideration.
Describe Preferred Provider Organization (PPOs) & how it differs from HMO
Preferred Provider Organizations (PPOs) are another alternative to traditional health care provision. PPOs, usually an association of cooperating physicians and hospitals, agree to provide employers with health care services for their employees at discount prices.
PPOs differ from HMOs, in the following 3 ways:
* First, the employer’s cost with PPOs is determined by use. A fee is charged for each use, but the fee is lower than the provider’s usual charge for the service provided.
* Second, covered employees do not have to use the personnel or facilities of the PPO. If employees use non-PPO providers, however, the employees pay higher costs. For example, physicians may agree to charge PPO members less than their customary fee for a particular service. In addition, the employer’s health care plan may provide reimbursement for 80 percent of the cost if a PPO provider is used, and only 60 percent if the employee uses a non-PPO physician.
* Third, the PPO arrangement may not provide coverage for annual physical examinations.
Practitioner Advice: A common source of frustration for employees is deciding which health option is best for their family. Usually there is one plan that is less expensive up front, but imposes larger out-of-pocket expenses for seeking medical attention. The other option tends to provide more benefits for little out-of-pocket cost, but requires almost twice as much in payroll deductions. No one can predict future medical needs; however, if the family does not have young children who are active and exposed to illness in school, there are no senior family members with deteriorating health or anyone with a major health condition, it may be wise to choose the first plan. If potential medical visits and out-of-pocket costs are less than the additional premium required for the second plan, you may save money. If the opposite is true, it may be less risky to purchase the high premium plan. Either way, if a medical spending account is available, contribute an amount that approximates the anticipated out-of-pocket cost, as the deducted money avoids taxation.
Exam Tip with Audio:
Describe COBRA and qualifying events
The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) was a major attempts by the federal government to increase access to health care.
COBRA required that employees and particular beneficiaries be allowed to continue their group health insurance coverage if coverage was lost for specific reasons. COBRA applies to employers with group plans covering 20 or more employees. The COBRA election period starts with the date of the notification and lasts for 60 days.
Exam Tip: COBRA has several noteworthy elements that are highly testable on the CFP Exam. As you set out to study COBRA, begin with the basics: the qualifying categories of coverage and their associated coverage periods. From there, focus on the ‘one-off,’bullet-point’ facts such as required number of employees and percentage of premimus.
Listen in below for an overview of these essential COBRA-related topics and more!
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* Understand the qualifying statuses for eligibility and maximum period of coverage
* Termination - 18 months
* Other ones - double that - 36 months
* Off one questions:
* Does not apply to companies with less than 20 employees
* When one is on COBRA, company has the right to charge them up to 102% of premium (2% is for administrative charges)
Lesson 7. Disability Income Insurance
Course 2. Insurance Planning
What are the three ways Disability contracts define disability?
Disability contracts typically define disability in one of three ways:
* Own occupation definition, which is usually referred to as “own occ.”
* Modified own occupation, with a time limit (e.g. 2 years) on “own occ” protection.
* Any gainful occupation definition, which is commonly, if somewhat inaccurately, called “any occ.”
Listen in for a thorough comparison of the commonly-used definitions of disability. Audio:
* Own occupation definition - if insured can’t do regular occupation, but can do another, still qualify for benefits. Ex. surgeon is injured and can’t perform delicate surgery, but can do other things in medicine. Most expensive type of coverage. Most detailed underwritten.
* Modified own occupation - for a limited period (typically 2 years), it’s on own occupation. For the balance of the benefit period, it’s any any occupation definition.
* Any gainful occupation definition - most restrictive for the insured. If they can do any occupation, then they are not considered disabled. (Ex. surgeon would not qualify for benefits with this type)
Practitioner Advice: After ensuring that the insurer being selected is strong and reputable, the most important factor in selecting a policy is its definition of disability. What good is a “cheap” premium if the insured will never be able to collect benefits due to restrictive definitions?
Describe the Own Occupation Clause
An own occupation clause deems the insured to be totally disabled when they cannot perform the major duties of their regular occupations. This is considered the most liberal definition of disability available, and thus the best to have. Because the own occupation definition of disability is the most favorable for the insured the premium for this type of policy is higher than those policies with less restrictive definitions of disability.
A regular occupation is the one in which the insured was engaged at the time the disability began. Under this definition, the insured can be at work in some other capacity and still be entitled to policy benefits if they cannot perform the important tasks of their own occupations in the usual way.
Own Occupation Example:
Doctor Smith was a 45-year-old neurosurgeon with a successful practice. Due to a car accident, he lost the use of his right hand, thereby ending his ability to perform surgery. After a long rehabilitation period, he was offered a teaching position at a prominent medical school. He had purchased an “Own Occ” disability policy when he was 30 and had selected a benefit period that would last until age 65. Due to this “Own Occ” definition, he not only collected benefits while totally unable to work, but even after he started his teaching position.
Practitioner Advice: Own Occuption level of protection is essential for any specialist (e.g. a trial attorney, a commercial architect, or a surgeon). Policies with “own occ” definitions are harder to find than previously, and there is an increased premium for the protection provided, but it is definitely worth the costs.
List the 3 Benefit Provision Components
The three basic components that establish the premium and define the payment of benefits under disability income policies are:
* The elimination period,
* The benefit period, and
* The amount of monthly indemnity.
All other parts of the policy relate to these common elements and are used to limit or expand their value in meeting the specific needs of the insured at the time of loss. The strength of a particular disability income plan lies in how liberally the insurance company permits these elements to operate within the policy provisions and through its own administrative practices.
Exam Tip: The elimination period, benefit period, and amount of monthly indemnity function as ‘dials’ that can be adjusted to secure a specific level of coverage and establish the premium amount. Listen in for additional facts about disability income insurance benefit provisions.
Audio:
3 main components (variables) in a disability policy. They impact the level of benefits and premiums. They’re like dials that can be turned up or down to tailor it to the client’s circumstances or needs. Or can change it over time.
* The elimination period,
* The benefit period (how long the benefits go to), and
* The amount of monthly indemnity.
Or can change it over time. Ex. Client picked up policy and now have enough funds to increase from 30 day to 180 day elimination period (would reduce the premium). Could then use the savings to increase the benefit period or monthly payment amount. Or could go somewhere else (umbrella ins).
Describe the Elimination Period
The elimination period, sometimes called the waiting period, refers to the number of days at the start of disability during which no benefits are paid. It is a limitation on benefits that is somewhat like a deductible in medical expense and property insurance policies. It is meant to exclude the inconsequential illness or injury that disables the insured for only a few days and that is more economically met from personal funds.
The major insurers allow for a temporary break in the elimination period so that the insured will not be penalized for any brief attempt to return to work before the elimination period has expired at the start of disability. The brief recovery is generally limited to six months or, if less, to the length of the elimination period. If the insured is then again disabled because of the same or a different cause after the interruption, the insurer combines the two periods of disability to satisfy the elimination period.
Practitioner Advice: Remember, deductibles, and elimination periods are forms of risk retention on the part of the insured. The more risk retained by the insured helps to reduce the premium charged. When a need exists and affordability is important, choosing a less than optimal elimination period, monthly benefit amount, or benefit period can be a good decision.
Describe Taxation of Disability Benefits
As with group health insurance, premiums paid by an employer for disability income insurance for employees are generally tax deductible by the employer as a business expense and are not considered taxable income to the employee. Employee contributions, on the other hand, are not tax-deductible by the employee.
Consistent with these two rules, the payment of benefits under an insured plan or a non-insured salary continuation plan result in taxable income to the employee to the extent that benefits received are attributable to employer contributions. Thus, under a non-contributory plan, the benefits are included in an employee’s gross income. Under a partially contributory plan, benefits attributable to employee contributions are received free of federal income taxation and benefits attributable to employer contributions are included in gross income. A tax credit may be available to persons who are totally and permanently disabled.
The benefits received from a disability income policy purchased individually with after-tax dollars are not subject to federal income tax and the premiums paid for the policy are not tax-deductible. If an employer pays the premiums for an individual policy insuring an employee and reports the premiums as compensation under IRC Section 162 the employee pays taxes on the premiums paid but the disability insurance benefits are then tax-free when paid.
Exam Tip: When determining disability benefit taxation, remember that the IRS will always get their share. Focus on the party that pays the premium and determine if the premium is paid with pretax or after-tax dollars.
Tax-deductions for premiums paid are only available to an employer as a business expense. Individually-purchased policies are not eligible for a deduction.
Audio:
* Taxation of disability insurance. Will most likely have a scenario on exam that employer is paying premiums (not includable in income to insured) and/or scenario with insured also has a privately paid disability policy that they pay with after tax dollars.
* Question - how much is the taxable portion of the benefits?
* Question - how much is tax free?
* Look to see who was paying the premiums and if it was pre or post-tax
* If employer paid benefit - no contribution from insured - benefit would be taxable to insured
* For private policy paid with after tax dollars - benefits received tax free
