Book 2 (Insurance) Flashcards
Kidney dialysis is covered in ______
Medicare Part A
4 Elements of an insurable risk
1) Sufficiently large number of homogeneous exposure units
2) Definite and measurable
3) Fortuitious or accidental
4) Cannot be catastrophic to insurance co.
5 Methods to control insurance risks
1) Avoidance - Avoid buying house w/ pool / Rent instead of buy
2) Diversification - Store assets at different locations
3) Reduction - Install safety systems
4) Retention - Deductibles / Coinsurance / Self-Insurance
5) Transfer - Insurance / Agreements or hedging contracts (“risk sharing”)
Risk Management Methods
“TRADR - IDALS”
Transfer = Insurance
Retention = Deductibles
Avoidance = Avoid
Diversification = Locations
Reduction = Safety measures
What is indemnity?
Restoring someone back to their financial position before the loss occurred
What is subrogation?
(Think: “I gotchu __bro_____”
Insurance company steps in on your behalf to get money from the person who caused harm to you.
“Insurer takes over rights to file…”
What is the general idea of “Insurable Interest”
You are buying insurance on something/someone because you could financially or emotionally suffer from the loss.
Contract Recission
Contract deemed null due to fraud, misrepresentation, concealment, or mutual mistakes
Kid has rights to keep obligation w/ insurer, but not other way around
Collateral source rule
Think “collatoral” in CoD.
Get reimbursed by insurance and have the right to after the person for lawsuit
What either increases the frequency or severity of a loss?
Hazards increase the exposure to loss
Tort
Civil wrong
(not breach of contract)
Intentional Tort
Deliberate harm
(Assault, libel, slander)
Unintentional Tort
Negligence or carelessness
Attractive Nuisance
Dangerous property attracting children (pool, etc.)
Negligence per se
Violating a statutory standard of care
Strict liability
Liability w/o fault (defective product, bacteria, etc.)
Absolute Liability
“Absolutely unneccessary”
High-Risk activity liability
(Keeping wild animals)
Vicarious Liability
(Respondeat Superior)
Employer liable for employee’s actions
Assumption of risk
Voluntary acceptance of known danger
Contributory Negligence
Injured party’s negligence bars recovery (jaywalking / drunk driving)
Comparative Negligence
Fault split between parties proportionally
Last clear chance
Final opportunity to prevent an accident (suppressing your road rage)
Life Insurance Needs Analysis Methods
1) Capital Utilization
2) Capital Retention/Preservation
1) Utilization = calculates present value of future need, but leaves no money at the end
2) Retention = assumes that only interest is distributed. Original capital left at the end.
Common fact about Disability income insurance
Carriers typically only issue about 50-60% of earned income (Can be improved by adding group disability)
General reason people purchase LTC insurance?
To cover certain dollar amounts per day
Think: per diem ($204 to $400 a day)
What type of plans are most common for Health insurance nowadays?
HMO & PPO
Which rating service provides detailed, histroical data on insurance carriers?
A.M. Best (A++ to F)
(all other rating services just provide ratings)
Participating vs. Non-Participating Life Insurance Policy
Participating =
Comparing 2 life insurance contracts.
What 2 things should you obtain?
1) A.M. Best report
2) Cost-Benefit analysis
How is schedule personal property endorsements (floaters) valued?
Agreed-value basis
(jewelry, golf equipment, stamps, coins, etc.)
What form is scheduled personal property endorsement?
HO-15
(“extra personal property”)
Personal Auto Policy (PAP) coverage
Section
A) Liability (100k per injured person, 300k per occurrence, 50k property damage)
B) Medical Payments (5k per person, 15k per occurrence)
C) Uninsured Motorist (100k per person, 300k per occurrence)
D) Damage to your auto ($500 deductible)
$$ amounts are examples
Personal Auto Policy rule if divorce, separation, or living apart?
Max 90 days until one of them needs to acquire their own PAP
Another term for PAP Part A liability coverage?
BI/PD
PAP coverage Part D covers what?
1) Collision = your car with another car
2) Other than collision = open perils type of coverage (WHARVES/FLT)
When you see “____” liability insurance, it is always correct
“Umbrella”
provides liability (BI/PD) coverage for catastrophic legal claims or judgements
Examples of professional liability insurance
Malpractice
- Common for bodily injury (physician/dentist)
Errors & Omissions
- Common for property damage (lawyers, insurance agents, stockbrokers, CFPs)
BOTH deductible premiums
Taxation of worker’s compensation benefits (ER & EE)
best of both worlds:
ER = deduct premium
EE = tax-free
Sick-pay and unemployment benefits taxation (EE)
Taxable to EE
Worker’s compensation claim falls under ____ liability
Absolute
Which statements about umbrella insurance policy coverage is true?
I. Provides excess coverage when basic liability coverages are adequate
II. Provides excess coverage when basic liability coverages are inadequate
III. Provides broader coverage than basic underlying policies
All are true
How does someone become eligible for Medicare Supplemental (Medigap?)
Must be currently enrolled in Medicare A AND B
Medicare Coverages:
A
B
D
Medigap Coverage
Medicare Coverages:
A = Hospital insurance (inpatient, hospice/terminally ill, skilled nursing facilities)
* B = Medical insurance (outpatient, doctor visits, medical equipment)
* D = Prescription drug coverage
Coinsurance/deductibles apply to all sections
* Pay premiums
Medigap Coverage:
Pay a premium for Medigap in addition to Part B premium,
BUT, this fills in the gaps by covering coinsurance and deductibles from Medicare
2 main differences of HMOs vs PPOs
HMO = In-network only (cheaper) & fixed premiums
PPO = In-network or Out-of-network (higher deductibles) & pay as you go
What does the ACA say about coverage for dependents under age 19
The Affordable Care Act stipulates that no insured can be denied coverage because of a pre-existing medical condition.
HSA = ?
Health Savings Account:
Need HIGH DEDUCTIBLE health plan
What type of deduction is an HSA contribution?
Above-the-line
(reduces AGI)
Who can make contributions to an HSA? (assuming they have a HDP)
Employer or Employee can contribute
ER funded = tax-deductible
EE funded = tax-free
Same rules as Disability premiums
Financial documentation comparison:
Disability focuses on verifying ________
Life insurance focuses on verifying _______
Disability focuses on verifying income to calculate benefits (which is why they require financial statements, but don’t require CF statement)
Life insurance focuses on verfiying financial need and net worth to justify death benefits
Disability:
Synonym for Salary Continuation plan?
Group Plan
EE = taxable
Disability:
Synonym for Bonus Arrangement plan?
Section 162
“Informal plan”
EE = tax-free (because it is considered part of their W-2 income)
Therefore, the disability benefit is “tax-free”
Keywords to look for in Disability Income questions (referring to net-of-tax monthly benefit)
1) “Salary continuation plan” / “group plan”
2) “Bonus arrangement plan” / “Informal plan” / Section 162”
What words are interchangeable for a “waiting period”?
Elimination Period (typically 90 day wait)
- if you have a 90-day wait period, you would pay the first 90 days of care yourself until insurance kicks in
Longer wait period = lower premiums to pay
Common provision of LTC insurance? (and most important)
Inflation protection provision
LTC policy must be G_ R_
Guaranteed Renewable
(adjustable premiums, but cannot be canceled)
Guaranteed Renewable
VS
Noncancellable
Guaranteed Renewable policies = typically found in Disability, LTC, some Health insurance policies
- Adjustable premiums
Noncancellable policies = typically found in high-quality Individual Disability policies
- Fixed premiums
BOTH CANNOT BE CANCELED!!!
LTC taxation of premiums? (Self employed vs others)
Self-employed -> Above-the-line deduction
All others -> Itemized deduction (7.5% AGI floor)
General rules regarding Medicare coverage combined w/ LTC?
I. Hospital stay of 3 consecutive days in order to qualify
II. The care needed must be skilled care
III. No more than 30 days lapse between hospital & admittance to skilled nursing facility
Services offered by Medicaid
Basically everything
To Qualify: <$2k in countable assets
Explain the difference:
A) 90-day elimination period, 6-yr benefit
B) 180-day elimination period, 6-yr benefit
Longer elimination period = lower premiums
Disability benefits are proportional to amount of income lost acurately describes ____ disability
Residual disability
Two main ways to determine the amount of life insurance required
1) Human Life Value
- PV of income lost by dependents
- **Does not consider **other resources
2) Needs Analysis
- Estimates needs following an individuals premature death
- Considers other resources
Synonym for “Fixed” premium or “Fixed” death benefit
“Level”
Synonym for “buyout policy”
Buy-Sell Agreement
Visual of a “Buyout” policy (common with businesses)
Term insurance “convertibility provision” allows what?
Exchange from Term to Permanent insurance w/o evidence of insurability
(Think of the hierarchy: Life Policy ——-> Life Policy ——-> Endowment —–>
Permanent Life Insurance examples
WL, VL, UL, VUL
(insurer covered until death)
Examples of Whole Life insurance
1) Straight Whole Life (“Ordinary Life” / “Continuous Premium Whole Life”)
2) Limited-Pay Whole Life
Example: 20-Pay Life = 20yrs of premiums, then you are insured for life
3) Single-Premium Whole Life
- Lump-sum to fund the entire policy
Clues to look for in “Limited-Pay Whole Life” policy answers
- Good health
- Family member longevity
- Guaranteed premiums
- Substantial wealth to pay premiums faster
Scenario: a client is concerned about company carrier failure. What type of policy is advisable?
VUL because the cash value would be in a separate account rather than tied up in the company’s general account
Regarding the test, which type of life insuranceis wrong or unusable?
Endowment Contract
(Typically does not meet financial needs and can lead to adverse tax consequences)
Why would someone consider a Second-to-die policy?
For estate liquidity purposes
What Riders (addons) can be added to Life insurance policies?
1) Disability waiver of premium
- Whole life = waives all premiums after disabled
2) Guaranteed Purchase option / Guaranteed Insurability option
- Can purchase additional insurance in intervals
3) Accidental Death / Double Indemnity
- ** Doubles DB ** if insured dies accidentally
Settlement Options (review chart)
National Association of Insurance Commissioners (NAIC)
- Voluntary association
- NO legal power!
For viatical purposes, a person is deemed terminally ill if…
He or she is certified by a physician that they are expected to die within 24mo.
Life insurance
What is the typical suggestion when a client needs a lot of coverage at a low cost?
Level Term policy (can be converted in future to a permanent policy if needed)
Keyword that indicates viatical agreement
“life expectancy is 2 years or less”
Which non-forfeiture option puts the insurer at risk?
Extended Term Insurance (“Paid-up” insurance)
=> Insurer is allowed to use a higher mortality table
If an insurance company has ___ of ___ ratios “outside usual ranges”m it is put on the NAIC ____
4 of 12 ratios on the NAIC watchlist
Benefits of an Accelerated benefit rider
The terminally ill insured can exclude the income amounts received from the accelerated benefits rider
Keywords/phrases to look for in insurance policy questions
- “wants to stop paying premiums”
- “wants to keep policy (DB) in tact”
- “wants to grow their policy”
Another term for “One-Year Term” dividend option
“5th Dividen”
(Dividend option for participating policies)
The Uniform Simultaneous Death Act (USDA)
If 2 people die within 120hrs. of each other, it provides that they predeceased each other.
=> Does not pass through each other’s estate
A contract is defined as an MEC if both of these apply:
1) Contract was entered into after 1988
AND
2) Failed to meet the “7-Pay Test” (excess premiums were paid within the first 7 years)
- Typically applies to single premium policies that pay alot up front
Is a Pure Life Immediate Annuity included in the annuitant’s estate after death?
No, it is removed. The idea is that you get a fixed stream of income by paying upfront until you die. No remaining value.
What do these annuities have in common?
Pure Life Annuity
Straight Life Annuity
Single Life Annuity
Lifetime-Only Annuity
Life Annuities:
- NO VALUE at death (no estate tax)
- Guaranteed income for life
- No beneficiaries
- High cost, high payout
If Life Annuities give:
- NO VALUE at death (no estate tax)
- Guaranteed income for life
- No beneficiaries
- High cost, high payout
What do Period-Certain Annuities provide?
Period-Certain Annuities:
- At death, payments go to beneficiaries
- Guaranteed income for a period
- Lower cost, lower payout
Immediate Annuity
Payments are made to you “immediately” (30 days to 1yr. from purchase)
- NO accumulation phase
Deferred Annuity
Payments are made to you at a future date
- Has accumulation phase to grow tax-deferred
Life Immediate Fixed Annuity
VS
Life Deferred Fixed Annuity
Life (until death) Immediate (Payments to you now) Fixed (fixed rate/amount) Annuity
Life (until death) Deferred (Payments to you later) Fixed (fixed rate/amount) Annuity
Highest income per dollar of outlay annuity
Joint and Survivor Annuity
SPDA
Single Premium (Purchased w/ lump-sum) Deferred (Earning accumulated tax-deferred) Annuity
Facts about Variable Annuities payout options
During accumulation phase, the return is variable (investment performance based), but once payments begin, the payout can be variable OR fixed amounts
What do these key phrases refer to:
“Attempt to cope w/ inflation”
“Keep up w/ market conditions”
Variable (Life insurance or annuity)
QLAC
Qualified Longevity Annuity Contract
- Deferred
- Fixed
- funded from IRA or qualified retirement account
- monthly income later in life
- defer longer = higher payout
- can defer income tax by reducing RMDs
How would earnings on a tax-deferred annuity be taxed? (Individual vs “Non-natural person”)
Individual = tax-deferred
Non-Natural Person (C-corp.) = Taxed at OI
If you don’t see “Immediate” in the annuity name, assume what?
Tax-deferred growth
What is HO-4 Policy?
HO-4 = Renter’s coverage
“4 letters in RENT”
What is HO-6 policy?
HO-6 = Condo coverage
“6 letters in condo?”
What is HO-8 policy?
HO-8 = Old house coverage
“8 is the highest # in the table”
What is HO-7 policy?
HO-7 = Mobile home coverage
When solving for property loss calculations, what must you do?
Solve for both…
1) ACV = RC - Depreciation - Deductible
2) Amount paid by Insurance = ((Actual insurance/RC x 80%)xLoss) - Deductible
…Then, choose the greater amount (this will be the amount that the insurer will pay)
Which parts of an auto insurance policy would generally be most important to a wealthy vs poor client?
Wealthy = Parts A and C
Poor = Parts B and D (would not have medical insurance or be able to repair their car)
For the exam, sinkhole is covered by homeowners insurance IF it does damage to the home
Disability insurance for an S-Corp
If you are the owner of an S-Corp = Tax-free benefits
Medicare Part A =
Medicare Part B =
(general)
Medicare Part A = Hospital
Medicare Part B = Doctors & Tests
Like-Kind Exchanges:
Section 1035
VS
Section 1031
Section 1035 = Life Insurance (Life to Life, Life to Annuity, Annuity to Annuity)
Section 1031 = Real Estate
Default answer for lower income/low cost life insurance
Term insurance
Life Insurance
Another way of saying “forced saving plan”
Whole Life
(bc you are forced to pay premiums)
Difference between conversion provision and reinstatement provision in insurance policies
Conversion provision = convert to permanent plan (do not need to prove insurability)
Reinstatement provision = Need to prove insurability
What is the answer when you see “Life Settlement”
Look for LTCG answer
Once a —, always a —
MEC (Modified Endowment Contract)
*for exam purposes: all single premium policies are MECs
Morbidity Table:
What is it?
What does it show?
- Statistical table showing probable incidence and duration of disability
- probable rate of death at each age (per thousand)
Parts of the Insurance Contract (DDICE)
Declaration page - factual statements that identify the person or property
Definitions - explanation of key terms
Insuring agreements - the basic premise of the insurance company
Conditions - the duties and rights of parties
Exclusions - circumstance when the insurer will not pay
For a contract to be “in force”, what is required?
Consideration / Offer & Acceptance / Legal object / Legal form
HO-6 coverage covers —- perils in Parts A & B
Explicitly named perils
Expenses that Medicare does not cover
- Foot care, eye care, hearing aids, dental work
- emergency care outside US
At what point is someone ineligible for HSA contributions?
Once enrolled in Medicare
(Eligibility for Medicare means nothing in this context)
What is the most important part about Disability Income Insurance plans?
The definition of total disability
Which provision only applies to Whole Life policies?
APL provision (automatic premium loan)
- If premiums are not paid on time, it is charged against the cash value of the policy
Describe an FSA (Code section 125)
“Cafeteria plan” / “use it of lose it”
Qualified Medical Expense (3.2k limit):
- Has either: 1) grace period 2) rollover up to $640
OR
Dependent Care:
- No grace period or rollover
Main use of FSA for qualified medical expenses?
Pre-tax and pre-FICA benefits to use for deductibles/coinsurance that were not reimbursed by insurance
Is a “self-funded” plan covered by COBRA?
Yes, a “self-funded” or “self-insured” plan is still considered an employer-sponsored health plan
HRA
- Employer funded ONLY
- No portability (if you leave the company)
- Unlimited contributions (employer ONLY)
Nursing home care coverage (days covered):
LTC
Medicare LTC
Medicaid
LTC = 100 days
Medicare LTC = 100 days
Medicaid = coverage past 100 days
Main advantage of using a group plan instead of multiple individual plans?
Lower costs
Benefit not included in a VEBA? (Voluntary employees’ beneficiary association)
Deferred Compensation
