CFP 1: Insurance & Investments Flashcards
How do you calculate the amount of Life Insurance needed? What two things do you have to do in addition to Paul’s calculation?
Take annual income, ÷ by rate of return. Add one year of income for the first year.
If you’re given a rate of inflation, subtract it from the rate of return; don’t bother calculating a real rate of return.
What is AM Best?
The most detailed insurance company evaluator. It’s ratings range from A++ to F.
Name HO-2, 3,4,5,6, and 8
HO-2 = Broad Peril HO-3 = Mostly Open Peril, broad for personal property HO-4= Renter's HO-5 = All Open Peril, also called H0 3/15 HO-6 = Condo's. Can have coverage against assessments HO-8 = Older homes, Basic Peril only.
Name Parts A, B, C, D, E, F, & I of Homeowners Ins.
Part A; Dwelling + attached structures (land is not insurable) Part B: Other structures (10% of A) Part C: Personal property (50% of A) Part D: Loss of use (30% of A) Part E: Medical payments Part F: Personal Liability Part I: Deductible
Name the Exclusions from Open Peril (Hint: Open WIFI)
Ordinance of law Power failure Earth Movement Nuclear accident/Negligence War Intentional Flood I should learn this =)
What are the two cost calculations insurance companies use, and which do they usually pay?
Replacement Cost and Cash Value Method. They pay the greater of the two.
How do you calculate replacement cost of a house for insurance purposes?
Replacement cost of house x co-insurance % (usually 80, sometimes 90). This is the amount you should carry.
Divide by 80%
Multiply by amount of loss.
Subtract deductible.
How do you calculate the cash value of a home?
Multiply replacement cost by factor of depreciation.
Subtract deductible.
Is Worker’s Comp taxable? Is Group Disability?
Worker’s Comp is not taxable. Group Disability is usually paid by the employer, thus the benefits are taxable.
Who is eligible for Medicare? (2)
People over 65.
Disabled people who have rec’d SS benefits for 2 years.
What does Medicare Part A cover?
Hospital stays, skilled nursing home, home health (not home care) or hospice care.
It doesn’t cover outside the US.
It pays after employer health ins. or worker’s comp.
What does Medicare Part B cover, and how does it work?
Name three things it includes and three things it excludes.
It covers Dr. visits, including for depression, counseling for ETOH, and CBT for cardiovascular disease.
It has a premium, a deductible, and an 80/20 split, with NO STOP LOSS
It excludes dental, visual, hearing, and drugs.
What is Medicare Part D?
It’s run by private companies approved by the govt.
Companies must provide a 50% discount.
It covers medications.
What are Medigap policies? What do they pay for?
Private insurance that covers deductibles and co-pays of Parts A and B.
It works like an HMO, so isn’t very flexible.
You must enroll in Medicare parts A and B to purchase.
What are the 3 types of disability insurance? Which one does CFP recommend?
Own Occupation (the one CFP recommends)
Any Occupation (that your training qualifies you for)
Split, which gives you a period of Own, followed by a period of any.
SS also has a “total disability” which means you can’t work at all, and likely won’t work again.
When are disability benefits taxable?
Hint: 3 answers. One for section 162, one for “salary continutation”, and one for S-corps.
If the ER pays the premium as a bonus (section 162), the benefit is tax free
If the employer pays the premium as a “salary continuation”, the benefit is taxable.
If an S-corp pays the premium to a partner or a > 2% ownerthe payments are deductible, and the benefits are tax free.
Does Medicare pay for LT care?
Does it pay for skilled nursing care? (If so, how?)
Does Alzheimer’s qualify for skilled nursing care under Medicare?
Medicare DOES NOT PAY FOR LONG-TERM CARE.
Medicare pays for skilled nursing care in 3 tiers
- Days 1-20 paid in full
- Days 21-100 require a co-pay of $185/day
- After 100 days, medicare doesn’t pay.
Note: For Medicare to pay, your condition must be expected to improve, so Alzheimer’s doesn’t qualify.
What are the only 3 ways you can pay for LT care?
LT care insurance
Your own assets
Medicaid
What is Whole Life insurance?
A cash value life insurance with a fixed death benefit. You can pay in a few installments or over many years. Must pass the 7-pay test, or it’s a MEC.
What is Term life insurance? What are Level Term and Decreasing Term?
Term is usually the cheapest for younger people, and the best for changing circumstances.
- Level Term keeps the premium constant over the term of the policy by pre-paying some of the later premium.
- Decreasing Term keeps the premium constant by reducing the death benefit as the insured gets older.
What are Universal A and B Life Insurance?
What is Variable Universal?
Universal A pays face value, and the company retains some of the cash value.
Universal B pays face value + cash value.
Universal life is flexible regarding adjusting the premium, the death benefit, and using the cash value to pay premiums or for additional insurance.
Variable Universal allows the owner to invest the cash value in the stock market.
For the CFP Exam, who is Whole Life best suited for? Variable? Universal? FTD Variable Universal? What is the point of STD LI policies?
Whole Life is for someone who wants to be forced to save, or who has little risk tolerance.
Variable is for someone who has investment knowledge, or has high risk tolerance.
Universal is for someone who can afford a premium presently, but might need to cut back because they have low job security.
STD LI policies are there to create liquidity at death.
Variable Universal FTD is the policy for cross purchase agreements
What is the difference between insurance contract provisions and riders?
Contract provisions don’t require additional premiums, riders do.
What is a Guaranteed Purchase or Guaranteed Insurability rider?
It’s a rider that allows you to purchase additional insurance at regular intervals without providing evidence of insurability.