CFP INSURANCE Flashcards
Basis differences btwn Stock Redemption and Cross-Purchase
Stock redemption: no step-up
Cross-purchase: step-up
Split Dollar Insurance
Endorsement method vs. Collateral Assignment Method
Endorsement method:
•Employer is owner
•Employee is not a shareholder
Collateral Assignment method:
•Employee is owner
•Employee is a shareholder•Employee assigns the policy
Annuity Taxation Formula
Basis / Payout = Tax-free (excluded)
Annuity Taxation
Lump sum payouts
LIFO
Ord Inc + 10% penalty under 59.5
When must FSA be used?
Medical FSA
Dependent Care FSA
Medical FSA - March 15 or forfeited to company (use it or lose it)
Dependent Care FSA - Dec 31
What tax are FSAs subject to? FICA, FUTA, or Income tax?
None
Can FSAs be used to reimburse premiums for other health plans?
No
Can FSAs reimburse for LTC?
No
5 definitions of disability
- Own Occ
- Modified any Occ
- Split definition - own then modified
- Any Occ (SSI def)
- Loss of income
DI policy continuance provisions
Nonforfeiture: policy won’t bc canceled and premium won’t change as long as paying
Guaranteed renewable: policy won’t be canceled as long as paying premiums, but insurance company can increase premiums for entire class
Taxation of DI policies
- Individual owns and pays prem
• Prem not deductible
• Benefits tax free - Employee owns policy and employer pays entire prem under bonus arrangement like Section 162
• Prem deductible to employer, employee recognizes prem in income
• Benefits tax free to employee - Employee owns the policy and employer pays entire prem under a salary continuation plan (group plan)
• Prem deductible to employer
• Benefits taxable to employee
Dividend options
• Cash
• Reduce premium
• Accumulate w/ interest
• Paid-up additions
• One-yr term/5th dividend
LI Nonforfeiture options
• Cash
• Extended term
• Paid-up reduced amount
5 keys to MEC contracts
- Established after June 21, 1988
- Fails to meet 7-pay test
- Distributions/withdrawals taxed at LIFO
- Distributions under 59.5 subject to 10% penalty (if not disabled)
- DB tax free
MEC grandfather rules
- If DB doesn’t increase by more than $150k and insured has guaranteed insurability, the policy WILL NOT lose its grandfathered status
- If policy increases by ANY amount and insured must prove insurability, the policy MAY MEC
Insurance Basic Perils
WHARVES/FLT
Windstorm, Hail, Aircraft, Riot, Vandalism, Vehicles, Explosion, Smoke, Fire, Lightning, Theft
Insurance Broad Perils
Basic plus RAF
Rupture of a system, Artificially generated electricity, Falling objects, Freezing of plumbing
Insurance Excluded Perils
OPEN WIF
Ordinance of law, Power failure, Earthquake, Nuclear hazard, Neglect, war, Intentional Loss, Flood
Property Loss Formula
Replacement cost x coinsurance % = amount of insurance required
[(Insurance carried / insurance required) x Loss] - Deductible = Amount paid by Insurance
Risk
Condition of possibility of loss
Peril
Cause of possible loss
Hazard
Condition that may create or increase chance of loss from a given peril
Life insurance needs analysis
Capital Utilization approach
Uses ALL capital to provide annuitization of needed income
Life insurance needs analysis
Capital needs approach or capital retention
Factors interest only so original capital is never touched.
Human life value
Amount of LI needed is based on individual’s income-earning ability. Does not take into account other resources available
Participating vs. nonparticipating LI policy
• Participating: insured receives annual dividends from willful overpayment of premiums. Dividend is usually tax free bc it’s considered a return of premium
• Nonparticipating: company retains profits instead of issuing dividends
Who can issue participating LI policies?
Mutual insurance companies and stock insurance companies
Insurance rating companies and their respective grades
AM Best A++ - F
Standard & Poor’s AAA - CCC
What is the only insurance rating company that provides detailed, historical data on carriers?
AM Best (all others just provide ratings)
Sections of HO policy
A - abode/dwelling
B - backyard/buildings/other structures
C - Contents/ personal property
D - Denial of use/loss of use - provides indemnity for necessary increase in living expenses incurred to continue normal standard of living
E - Everybody wants to SUE me/personal liability -comprehensive liability insurance
F - Find me a doctor/medical payments to OTHERS, not insureds family
HO Personal Property coverage
• covers contents and personal property owned or used by any insured while anywhere in the world (Boats and trailers are limited to $1k)
Property excluded under HO - C
• Animals of all varieties
• motorized land vehicles (not riding mowers) and aircraft
• property of roomers, boarders, and other tenants
• property contained in an apartment regularly rented or held for rental to others by the insured
HO Replacement cost coverage
• generally recommended
• provides losses will be paid at replacement cost rather than actual cash basis
• only applies to buildings
Actual Cash Value (ACV)
Replacement value less depreciation
• personal property is covered for ACV
HO - B, C, & D coverage %
• B - 10% of A
• C - 50% of A
• D - 30% of A
PAP $100,000/$300,000/$50,000
$100k per person
$300k per occurrence
$50k property damage
PAP coverages
A - liability (BI/PD)
B - medical payments (Med-pay) only covers expenses w/in 3yrs of accident
C - uninsured motorists (UM) liability protection
D - Damage to your auto
Other than collision perils
• falling objects
• theft
• earthquake
• flood
• riot
• Contact w/ animals
Medicare Skilled Nursing Home Care coverage
• pays 100% of first 20 days
• pays excess above $194.50/day for 21- 100 days
• no coverage after 100 days
S Corp and Partnership taxation of DI benefits
Can deduct the premiums for partner or greater than 2% shareholder due to conduit income. Benefits are then excluded from taxable income bc the employee has paid the premium
Can a 1035 exchange be done if the insured has changed?
No
Difference btwn viatical settlement and life settlement
• viatical is for critically or terminally ill and is tax-free to insured
• life settlement is for a healthy individual generally over 65. Taxed at LTCG. (Look for LTCG answer)
Medigap or Medicare Supplemental policy requirement
Must be enrolled in Medicare A and B
What’s included in workers comp
• Medical expenses- without limit on time or money
• Disability income
• Death benefits payable to family
• Rehab benefits (medical and vocational)
