Austin Insurance Deck Flashcards
Pure Risk vs Speculative Risk
Pure Risk:
Chance of Loss or No Loss (NEVER PROFIT)
Pure Risks are the only insurable risks
Speculative Risks:
Chance of Loss; No Loss; OR PROFIT
Generally undertaken by Entreprenuers
Generally NOT insurable and completely voluntary
Static Risks:
Involve risks brought about by irregular action of nature or by dishonest misdeeds and mistakes of man
Dynamic Risks:
in which the core of risk resides in the change in the environment caused by the changing human condition
Subjective vs Objective Risk
Subjective:
Risk Assessment differs based on an individual’s perception of risk
Objective Risk:
Risk does not depend on perception as it is measurable and quantifiable
Law of Large Numbers
- Specifies that when more units are exposed to a similar loss, that the predictability of such loss to the entire pool will increase
- more exposure = more likely to get an accurate estimate of actual cost
- Helps to reduce objective risks
Adverse Selection
- Tendency of someone with a higher than average risk to purchase or renew insurance policies
- Premiums paid are a balance of favorable and unfavorable applicants (risks)
- Managed through underwriting; denying insurance (front end); and Raising Premiums (back end)
- UNDERWRITER is responsible for managing adverse selection
Elements of a Valid Contract
- One party must make an offer and the other party must accept the offer
- Both parties must be legally competent AND be 18 or older (if not; minor can void contract)
- Legal Consideration: Promise to pay
- Contract must pertain to a lawful purpose
3 Legal Principles of Insurance Contracts
1. Principle of Indemnity:
* an insured is only entitled to compensation to the extent of financial loss
* Cant make a profit from an insurance contract
2. Subrogation Clause:
* Insured CANT receive compensation from both insurer and 3rd party
3. Insurable Interest:
* Insured must have an emotional or financial hardship resulting from the loss
* Property/ Liability Insurance: Must exist at INCEPTION AND TIME OF LOSS
* Life Insurance: Mus exist at INCEPTION ONLY
Adhesion vs Aleatory
Adhesion:
* Life Insurance is “take it or leave it”
* No negotiations
* ANY ambiguities in a contract will go in favor of insured
Aleatory:
* Money exchanged between insured and insurer may be UNEQUAL (like in term)
National Association of Insurance Commissioners (NAIC)
Provides a watch list of insurance companies based upon financial ratio analysis
* Measures financial health of insurance companies
NAIC ha NO regulatory authority over insurance industry BUT is involved in accrediting state insurance regulatory offices
Types of Insurance
1. Term Life Insurance
* Pure insurance protection that pays a predetermined sum if insured dies in a period of time
* Use it or Lose it insurance
* no cash value; investing; or savings component
2. Whole Life/ Permanent Life Insurance
* Whole life policies provide lifetime protection if premiums are paid as agreed.
* Whole life policies have a savings or investment component with earnings accruing
* Whole life policies provide tax deferred growth of cash value.
* Whole life provides permanent protection until age 100-120.
3. Variable Life:
* The cash value is invested in stock, bond, and money market mutual funds. An opportunity for higher returns on cash value exists with variable life.
* The death benefit and cash value fluctuate based on investment performance.
4. Universal Life:
* The insured may adjust: Premiums paid, face value of the policy, and cash value (adjustable death benefit + Premiums)
* The insured does not direct the investment portion of the cash value.
* Cash value can be used to actually pay the policy premiums. Cash value grows tax deferred
5. Variable Universal Life:
* A product with investment options such as stock, bond, and money market mutual funds.
* There is no minimum guaranteed rate of return or interest.
* The cash value is invested in a separate account, not the insurer’s general account. Policy Owner chooses the investments
* The cash value is not guaranteed but in the event of an insurance company failure, the separate account will not be treated as an asset of the insurance company.
Universal Life Insurance Type A and Type B
Universal Life - A:
* A flexible premium, adjustable death benefit, unbundled life insurance contract.
* provides level death benefit
* beneficiary receives the cash value OR the death benefit
Universal Life - B
* Same as Universal A except that death benefits vary directly with the cash values. Death Benefit CAN INCREASE with investment
* Universal B is more expensive than Universal A because the death benefit is equal to a specified amount of insurance plus the cash value.
* Beneficiary receives cash value AND death Benefit
Defense of Negligence
Assumption of Risk.
* A person cannot sue a ski resort if injured while skiing because the skier assumed the risk associated with skiing.
Negligence on the part of the injured party.
* The negligent act of the injured party caused the injury.
Contributory.
* A person’s negligent actions contributed to the loss.
* This is a very severe defense and the injured party cannot recover.
Comparative.
* A person’s negligent actions contributed to the loss but they can recover a portion of the loss from the other negligent party.
Last Clear Chance Rule.
* The plaintiff can collect even if there was contributory negligence on the plaintiff’s part if the plaintiff can prove the defendant had a last clear chance to avoid the accident.
Res Ipsa Loquitur
- The act speaks for itself.
- If an accident occurred, then there was negligence.
* For example, if there is an airplane crash, the act speaks for itself and negligence occurred.
Vicarious Liability
A person is responsible for the acts of others.
* For example: A bartender serving alcohol to a customer who later causes an accident or a parent is responsible for acts of their children.
Parts of a Personal Auto Policy
Part A: Liability Coverage
1. Bodily Damage per Person
2. Bodily Damage per Occurance
3. Property Damage per Occurance
* Covered persons include you, any family member, any person using your car with your permission
Part B: Medical Payments.
* Covered persons include you or any family member while occupying the auto, you or any family member as a pedestrian struck by an auto, any other person while occupying your covered auto.
Part C: Uninsured Motorists.
* Pays what an “under-insured” or uninsured driver should have paid IF THEIR FAULT
Part D: Coverage for Damage to Your Auto.
* Provides direct damage coverage on your covered auto and any non-owned auto (rental or borrowed car)
* Can be Collision OR Comprehensive “Other than Collision”
Part E: Duties After an Accident or Loss.
Part F: General Provisions.
* Insurance coverage ONLY applies in U.S; Canada; Puerto Rico NOT MEXICO
* An insured must notify their insurer about a new car purchase within 30* days of buying the new car.
Additional Notes:
1. Car Insurance DOES NOT APPLY if used for a business trip
Who is eligible for survivorship benefits under social security?
When Decedent is FULLY insured (40 quaters):
1. Children under 18 are always covered (19 or under if CURRENTLY in highschool)
2. Spouse if Caretaker of children under 16
3. Spouse age 60 or older if worker is fully insured
4. Dependent parents age 62 or older if worker is fully insured.
5. Ex spouse if they were married for over 10 years AND SHE IS AGE 60 OR OLDER (taking care of kids does not matter)
When Decedent is Currently Insured
1. Spousal benefit ONLY if caring fro a child under age 16
2. Benefits to a child under 18 (19 if in highschool/ secondary)
Parts of Medicare
- Part A: Basic Hospital Insurance
- Part B: Dr. Insurance (Supplementary Medical Insurance)
- Part C (Medicare Advantage): Private Insurance that is an alternative to traditional Medicare
- Part D: Prescription Drug Coverage
General:
1. Methods to cover past 100th day of Hospital: Medicaid; LTC; Individual Savings
2. DOES NOT provide health care coverages for services received outside of the U.S.
3. Medicare is an 80/20 split with NO STOP LOSS LIMITS
4. Disability is defined as ANY OCCUPATION
5. Lump Sum Death Benefit: $255 (Paid as long as Fully OR Currently insured)
7. Skilled Nursing is the HIGHEST level of care
8. When you are employed, Medicare provides SECONDARY health coverage, employer provides primary
What is NOT covered by Medicare Part B
Things NOT covered by Medicare:
a. Dental care/ dentures
b.Cosmetic surgery
c. Hearing aids
d. Eye exams
e. Initial preventive visit and annual wellness visits
f. Custodial Care
1035 Exchange
a. Section 1035 provides for tax free exchanges of some insurance policies
b. Tax Free Tree: Life Insurance→Modified Endowment Contract→Annuity (non qualified)
Types of Insurance Hazards
a. Moral Hazard: Character flaw; filing a false claim
b. Morale Hazard: Indifference of someone to risk because they know that they are insured
c. Physical Hazard: Tangible hazard that makes a peril more likely to occur
Life Insurance Dividend Payout Options (C.R.A.P.O)
C: Cash/ Check
R: Reduce future premiums
A: Accumulate at Interest
P: Paid Up Additions
O: One year term (5th option)
COBRA (Requirements and Coverage)
Requirements
i. Employers with 20 employees or more
ii. Requirement for employer to continue healthcare benefits for a specified period of time
iii. Charged premiums cannot exceed 102% of cost to plan for similarly situated individuals
Coverage Time
i. 18 months: Normal Termination
ii. 29 Months: Disabled employee or dependent of employee
iii. 36 months: Death of employee; employee reaches medicare age; divorce; plan terminates without replacement; dependent exceeds age 26
c. GROSS MISCONDUCT MEANS NO BENEFITS
Homeowners Insurance Coverages (Section 1 and 2)
Section 1: Coverages (A-D)
i. A: Dwelling and attached Structure
ii. B: Other Structures (removed)
iii. C: Personal Property (Property Inside Home)
iv. D: Loss of Use (pays while you cant use)
Section 2: Coverages (E-F)
i. E: Personal Liability (Pays Damages and Cost of Defense)
ii. F: Medical Payments to Others (Even when insured is not liable)
FLOOD is an EXCLUDED Peril
Homeowners Insurance Forms (7)
a. HO-1: Basic Form (covers basic perils)
b. HO-2: Basic and Broad (covers basic and broad perils)
c. HO-3: Special Form (Provides coverage on an “open perils” or “all risks” basis to dwelling)
d. HO-4: Contents Broad Form (Renters Insurance)
e. HO-5: Comprehensive Form (Dwelling and Personal covered under OPEN PERILS)
f. HO-6 Unit or Condo OWNER (covers all but building for the owner of a condo that is leasing to someone)
g. HO-8: Modified Form (Covers Repair rather than replacement cost)
Social Security Tax Components
- OASDI: 6.2% UP TO S.S Wage Base ($147,000)
- Medicare Tax: 1.45% WITHOUT any Cap
- Additional Medicare Tax: .9% on all income over $200k ($250k MFJ)
Social Security Taxation Formula and Tranches
S.S Formula
i. MAGI = AGI + ½ S.S Benefit + Non-taxable Interest+ Foreign Earned Income
Social Security Tranches
i. 0% Tranch: 0-25k (Single); 0-$32k (MFJ)
ii. 50% Tranch: 25k-34k (Single); 32k-44k (MFJ)
iii. 85% Tranch: Over 34k (Single); Over 44k (MFJ)
Transfer for Value of Life Insurance (Define and Rules)
Death benefit of life insurance is Tax Free UNLESS Transferred for Value
i. Occurs if life insurance policy is exchanged for value
ii. Basis received is tax free, but benefit over basis is taxed at income
Transfer for Value EXCEPTIONS
i. Transferred to insured
ii. Transferred to a partner of insured where insured works
iii. Transferred to a corporation where insured is a shareholder
iv. Transferee takes the transferors basis in the contract
v. Stock Redemption (entity owned buy/sell) ARE NOT taxed on death benefit
Transforee Tax Calculation: Transforee Pays Tax On:
* Death Benefit - Basis - Additional Premiums Paid
Ordinary Annuity vs Annuity Due
Ordinary Annuity:
i. Assume ordinary annuity if nothing is said
ii. Look for the problem to say “at the END of each pay period”
iii. Set Calculator to END MODE
Annuity Due:
c. Look for problem to say “At the BEGINNING of each pay period”
d. Financial calculator must be set to BEGIN MODE
Group Insurance Information
- Long Term Care premiums paid by an employer ARE EXCLUDED from taxable income to the employee
- Long-Term Care insurance CANNOT be included in a cafeteria plan
Medicare Part C (Medicare Advantage)
- Medicare Advantage acts like and HMO, PPO or POS plan. It will cover vision, dental and hearing that are not covered under part A or B.
- Medicare Part C provides coverage BEYOND what is provided by Part A and Part B
Important Life Insurance Policy Information
- Suicide Clause: Insurance Company WILL NOT pay for suicide within 2 years of policy inception….After 2 years, they pay
- If inacurate information is provided and someone dies: Death benefit is adjusted based on the PERCENTAGE of policy that was paid (% of Required Premium X Benefit = Death Benefit Amount)
Modified Endowement Contracts (MECs)
- Designation given to cash value life insurance policies that dont meet the 7 pay test
- Once a life insurance policy is determined to be a MEC, it is irreversible
- Loans and withdrawals are taxed on a LIFO Basis (disadvantage)
- Policies issues prior to 1988 are grandfathered, but they can still become a MEC if they undergo a material change
Insurance Needs Analysis
1. Needs Approach
2. Multiples of Earnings Approach
3. Income Replacement Approach
4. Human Life Approach
Needs Approach:
1. Evaluates the income replacement and lump sum needs of survivors
2. Future cash or income need is discounted using the present value of that future cashflow
Human Life Value Approach:
1. Uses projected future earnings less self-maintenance costs as the basis for the $ need
2. Includes: Current earnings; future growth of earnings; # working years; self maintenance; cap rate
General:
1. For Life Insurance Needs CFP must consider: needs; health of person and health of parents (longevity); expenses; social security/ income
2. NO NEED to consider health insurance coverage
Taxability of Life Insurance
Death Benefit:
1. Death benefits are generally excludable from income taxation
Life Insurance Policy Dividends:
1. Not taxable up to return of premiums
2. Amount above premiums are taxable
Withdrawals and Loans:
1. IF MEC: Taxable at LIFO Basis: taxed on O.I basis until cash value or ln equals accumulated premiums (basis). Subject to 10% penalty before age 59.5
2. NOT MEC Withdrawal: Withdrawals are tax free up to premium (basis). Then taxed on a FIFO basis
3. If Not Mec Loans: Loans ARE NOT taxable
If Policy is Surrendered DURING LIFE:
1. All benefits taken (lump, interest,etc) are ONLY taxed above basis at O.I
Taxation Life Insurance:
1. Transfer For Value
2. Viatical Settlements
Transfer for Value:
1. When transferred for value taxable to transferee to the extent proceeds exceed basis/ premiums paid
Transfer for Value Exceptions NOT TAXABLE:
1. Transfer to Insured
2. Transfered to CURRENT business partner
3. Transfered to partnership of insured
4. Transferred to a corparation in which insured IS CURRENTLY a shareholder
5. Carryover basis
Viatical Settlements Taxation:
1. If Terminally Ill (24 months to live): Not taxable to insured or recipient
2. Chronically Ill: Not taxable ONLY if used for last expenses or Medical Expenses
Disability Insurance Options
Any Occupation (MOST RESTRICTIVE definition):
* Must be unable to perform ANY occupation to receive benefits
* WAY LESS EXPENSIVE
Own Occupation (LEAST RESTRICTIVE definition):
* Can’t perform your own occupation (even if you can perform other jobs
* Way MORE EXPENSIVE
* REMEMBER: My Job is EXPENSIVE!
Split Definition:
* Begins with own occupation; then moves to modiefied any occupation (suited for through education and training)
Social Security Integration:
* Once social security begins paying out, disability payments to you go down
* Socia Security Integration is LESS EXPENSIVE
General:
* Probation Period = period of time insured must wait before specified illnesses or injuries are covered
* Noncancelable and guaranteed renewable CAN be renewed
* Insurer can change benefit if employer changes job
* Premiums are NOT deductible by employer
Disability Insurance:
1. Meaning
2. Clauses
Disability Insurance General:
1. Provides benefits if worker is injured on the job
2. Any Occupation: person cannot do ANY occupation (less expensive because less likely)
3. Own Occupation: Person cannot perform their own occupation (more expensive)
4. Can be integrated with Social Security (this is less expensive because benefits offset by SS income)
Common Clauses:
1. Non-Occupational: disability policy will be offset by workers compensation pay
2. Residual: cover a partial disability and pay a % of income if unable to return to work in full capacity
Long Term Care Policy
General:
1. Pays for cost of care due to chronic illness, disability, or illness
2. Pays benefits to people that have 2 of 6 ADLs OR Cognitive disability (Alzheimers)
3. If premium is paid by employer, benefits ARE taxable
4. If premium is paid by insured, benefit is tax free
5. Qualified Policy CANNOT have cash value
6. Excess benefit ABOVE need IS TAXABLE
Medicaid
Benefits that MUST be provided:
1. home health services
2. outpatient and inpatien hospital services
3. transportation to medical care (ambulance)
4. Physician Services
General Information:
1. Can only have $2,000 in cash
2. Excludes primary residence and 1 vehicle
3. Monthly Income Limit: $2500
4. Medicaid Clawback: Medicaid can penalize you for all assets gifted away in the previous 5 years
State AND Federally Run
Incidence of Ownership of Life Insurance Policy
- Right to name a beneficiary
- right to surrender the policy
- right to assign a policy
- Right to borrow from a policy
Collateral Assignment:
A temporary transfer of some or all of the ownership rights whereby such rights revert to the assignor upon satisfaction of agreed-upon conditions.
Absolute Assignment:
an irrevocable transfer of all ownership rights which can be accomplished through a sale or gift.
Business Interuption Insurance
Business Interuption Insurance
1. Covers indemnity for businesses during the period where they are rebuilding and restoring after covered losses have forced a halt of business as usual.
2. In easy terms: business interuption insurance pays company incase of business halt due to a peril
Contingent Business Interuption:
1. Used when A BUSINESS YOU DONT OWN slows down your business
2. it is a business which you do not own that has a direct effect on your own business
