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CFP Exam > CFP Insurance Planning > Flashcards

CFP Insurance Planning Flashcards

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1
Q

Is speculative risk insurable?

A

Speculative risk is generally voluntary risk and not insurable.

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2
Q

Objective Risk measures what?

A

Measurable and quantifiable

Measures the variation of an actual loss from expected loss

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3
Q

Which of the following is an insurable risk?

Objective Risk
Pure Risk
Subjective Risk
Speculative RisK

A

Pure Risk

It involves the risk of loss or not loss and is the only insurable risk

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4
Q

Definition of SEVERITY

A

Severity is the actual dollar amount of a loss

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5
Q

What is the Law of Large Numbers

A

Specifies that when more units are exposed to a similar loss, the predictability of such a loss to the entire pool increases

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6
Q

Definition of PERILS

A

Actual cause of a loss

EX: fire, wind, tornado, earthquake, burglary, collision

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7
Q

Definition of HAZARD

A

A condition that increases the likelihood of a loss occurring

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8
Q

Definition of MORALE HAZARD

A

The indifference created because a person is insured

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9
Q

Definition of PHYSICAL HAZARD

A

Tangible condition that increases the probability of a PERIL occurring

EX: Icy roads, defective equipment

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10
Q

What is ADVERSE SELECTION?

A

The tendency of persons with higher-than-average risks to purchase or renew insurance policies

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11
Q

Insurance risks are CHAD. What does CHAD stand for?

A

not Catastrophic
Homogenous exposure
Accidental
measurable and Determinable

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12
Q

Elements of a valid contract are COAL. What does COAL stand for?

A

Competent Parties

Offer and Acceptance

Legal consideration

Lawful purpose

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13
Q

What is the Principle of Indemnity?

A

An insured is only entitled to compensation to the extent of the insured’s financial loss

An insured cannot make a profit from a contract

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14
Q

What is the SUBROGATION CLAUSE?

A

The insured cannot receive compensation both from the insurer and a third party for the same claim.

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15
Q

What is the Principle of Insurable Interest?

A

Must have an emotional or financial hardship resulting from damage, loss, or destruction

Must have an insurable interest at the time of policy INCEPTION

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16
Q

VOID vs VOIDABLE

A

Void contract was never valid. Lacks COALL

Voidable contract is a valid contract that allows cancelation by one of the parties, other party is still bound.

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17
Q

What is a warranty?

A

A promise made by the insured to the insurer

Breach of warranty is grounds for avoidance

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18
Q

Representations definition

A

Statements made by the insured to the insurer during the application process.

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19
Q

What is CONCEALMENT?

A

When the insured is silent about a fact that is material to the risk.

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20
Q

Definition of ADHESION?

A

No negotiations over terms and conditions.

Ambiguities are found in favor of the insured.

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21
Q

Definition of ALEATORY?

A

The money exchanged may be unequal.

EX: small premium, large benefit possible

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22
Q

Definition of UNILATERAL?

A

Only one promise is made by the insurer

Insured is not obligated to pay the premiums. If not paid, no promise to the insurer

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23
Q

Meaning of CONDITIONAL?

A

The insured must abide by the terms and conditions of the insurance contract. If the terms are not followed, the insurer may not pay a claim

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24
Q

Definition of WAIVER?

A

When one party relinquishes a known right.

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25
Q

Definition of ESTOPPEL?

A

Takes place when a party is denied assertion of a right to which they are otherwise entitled.

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26
Q

Definition of WAIVER PROVISIONS?

A

an insurer may seek to avoid liability associated with a loss due to their agents offering policy changes not authorized by the company

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27
Q

Dispute Remedy:

Parol Evidence Rule

A

Once the contract is placed in written form, all previous and prior understanding may not contradict the compete understand of both parties

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28
Q

Dispute Remedy:

Reformation

A

Contractual remedy in which the contract is revised to express the original intent of all parties

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29
Q

Dispute Remedy:

Recission

A

Deems a contract void from inception

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30
Q

What is an agent?

A

legal representative of the insurer

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31
Q

Who does a BROKER represent?

A

the policy owner NOT the insurance company

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32
Q

What is EXPRESS AUTHORITY?

A

Given through an agency or written agreement

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33
Q

What is IMPLIED AUTHORITY?

A

Authority that the public perceives, and a valid agency agreement exists

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34
Q

What is APPARENT AUTHORITY?

A

Apparent authority is when the insured believes that agent has authority to act on behalf, when in fact, no authority actually exists

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35
Q

Insurance Contracts: CONDITIONS

A

Details the duties and rights of the insured and insurer

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36
Q

Insurance Contracts: DECLARATIONS

A

Includes the name of the insured, description of the property, amount of coverage, amount of premium, term of the policy, inception/termination dates

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37
Q

Insurance Contracts: EXCLUSIONS

A

This section outlines specifically what will not be covered

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38
Q

Insurance Contracts: RIDERS AND ENDORSEMENTS

A

Written additions to an insurance contract (customization)

These take precedence over conflicting terms

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39
Q

Who regulates the insurance industry? FED or STATE

A

State

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40
Q

Valuation of Insured Losses: REPLACEMENT COST

A

Current cost of replacing property with new materials of like kind

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41
Q

Valuation of Insured Losses: ACTUAL CASH VALUE

A

Replacement cost - depreciation

Almost all AUTO policies are ACV

42
Q

Valuation of Insured Losses: AGREED UPON VALUE

A

Determined jointly by insured and insurer

Typically used for art and antiques

43
Q

Definition of DEDUCTIBLES

A

A stated amount the insured must pay before the insurer will make payments

Form of retaining risk

44
Q

Definition of COPAYMENTS

A

In addition to deductibles

Common with health insurance: $500 deductible and an 80/20 copayment clause

Insured is responsible for 20% expenses above deductible

45
Q

Definition of COINSURANCE

A

Insured covers at least a stated percentage of the property value

46
Q

Definition of SUPERANNUATION

A

Outliving funds saved for retirement

Mitigate risk: ANNUITIES

47
Q

What does NAIC do?
National Association of Insurance Commissioners

A

Watch list of insurance companies

Based upon financial ratio analysis

NO regulatory power!! Reg occurs on STATE level

Involved in accrediting state insurance regulatory offices

48
Q

Steps in RISK MANAGEMENT
D-I-E-D-I-E

A

Determine objectives of risk management

Identify risks

Evaluate probability

Determine alternatives

Implement

Evaluate, monitor, review.

49
Q

GENERAL INSURANCE UNDERWRITING
Insurance companies issues 1 of 4 underwriting policy standards

A
  1. Preferred (lowest policy premiums)
  2. Standard (avg risk for insurance company)
  3. Rated (greater premium in return for providing the insurance)
  4. Decline (insurance company doesn’t accept risk)
50
Q

Factors that effect PREMIUMS

A

health

family health history

risk factors

credit rating

driving record

51
Q

An insurable interest for life insurance must exist when?

Beginning of policy?
Middle?
End of policy?

A

At policy INCEPTION only

52
Q

Mortality Cost

A

Face amount of a policy and the chance the policy is going to have to pay out as a claim

Directly tied to cost of insurance

53
Q

Term Insurance

A

Very closely approximate MORTALITY COSTS

PURE insurance protection ( NO investment, NO cash value )

Protection ceases at the end of the term

Very inexpensive at young ages, good for clients with children

54
Q

Term Life Policies : ANNUABLE RENEWABLE TERM

A

Premium increases annually (STEPS)

NO cash value

Death benefit is FIXED

INEXPENSIVE

Can be CONVERTED to a permanent policy.

Think “renting” insurance.

55
Q

Term Life Policies : LEVEL TERM

A

For a specified PERIOD OF TIME

NO cash value

Death benefit is FIXED

Premiums are LEVEL (overpay premiums initially)

Can be CONVERTED to a permanent policy.

56
Q

Term Life Policies : DECREASING TERM

A

Premiums are level

Death benefit DECLINES over time

NO cash build-up within the policy

(EX: Most appropriate use would be to payoff a mortgage)

57
Q

whole life

A

lifetime protection

pre-fund future higher mortality costs

death benefit level

premium level (NO flexibility)

CASH value can be used for loans or may be received if surrendered

may received DIVIDENDS

58
Q

modified whole life

A

stair step premiums

59
Q

Universal life

A

Very flexible, can change premiums/face value/cash value

May increase above initial face value amount, depending on cash value

NO control over investments

Cash value can be used to pay the premium

60
Q

Variable whole life

What does it mean?

Death benefit?

A

Insured directs investments

Opportunity for higher OR lower returns

Death benefit AND cash value FLUCTUATE based on PERFORMANCE

61
Q

Participating Whole Life Insurance

2 Options?

Taxable?

A

Dividends paid to insured

Goes toward premiums

NOT taxable, return of basis

62
Q

Ordinary Whole Life

A

Pay premiums until age 120

Cash value INCREASES TO FACE VALUE at age 120

Death Benefit is LEVEL

63
Q

Limited Pay Whole Life

A

Pay in X payments instead of every year

Premiums are HIGHER than ordinary life because the insured only pays premiums until a certain age

64
Q

Whole Life Advantages / Disadvantages

A

ADVANTAGES:
-Whole life
-Earnings tax deferred
-ESTATE PLANNING (liquidity at death)

DISADVANTAGES
-policy is expensive
-premium is not flexible
-there is a gradual cash value growth
-insured may not be able to purchase as much protection

65
Q

First-to-Die - Customized Whole Life Policy

A

Will pay when the first person out of two dies

66
Q

Dividend Options on life insurance policy

A

Check

Buy more insurance

Increase cash value

Reduce premiums

One-year term insurance (5th dividend)

67
Q

Nonforfeiture OPTIONS

A

Cash surrender Value received

Reduced Paid-up insurance

Extended term insurance (change to specified duration)

68
Q

Taxation of DEATH BENEFITS

A

Generally EXCLUDABLE from taxable income

Dividends are NOT taxable until withdrawn

Distributions for amounts GREATER THAN basis are TAXABLE

69
Q

Modified Endowments Contract (MEC)

A

Money going in too fast

in IRS eyes, investment

7-pay test FAIL (pay for ins. w/in 7 yrs)

Withdraws treated on LIFO basis (earnings taxed before premiums)

10% penalty

ONLY AN ISSUE IF WITHDRAWING MONEY

70
Q

If the insured surrenders the policy prior to death, the insured may take cash value as:

A

Lump Sum

Interest only

Installment payments

71
Q

Are premiums tax-deductible for an individual?

A

NO

72
Q

Are premiums tax-deductible for an employer?

A

YES, for the first $50,000 of coverage

typically group-term

Premiums paid by the employee are w/after-tax dollars

73
Q

Exceptions to Transfer for Value Rule

A

Transfers to:
-the insured
-partnership of insured
-corporation in which insured is a shareholder
-transfer that results in carryover basis from transferor to transferee

74
Q

Taxation of Viatical Settlements

A

Viatical company has to pay taxes on gains over sale price

75
Q

Current Assumption Whole Life

A

Insurer uses new money rates and new mortality rates to establish premiums

Insurer reserves the right to adjust the premium once, usually at the 5-yr mark

76
Q

Why is Whole Life Insurance appropriate for Estate Planning?

A

Whole life provides liquidity to pay transfer taxes.

77
Q

Second or Last-to-die policy

A

Provides death benefits when second or last insured dies.

Appropriate for estate taxes/provide liquidity

If held in a trust, it will not add to the insured estate tax

78
Q

Participating - Dividend options

A
  1. Cash
  2. Reduce premiums
  3. Accumulate interest (tax free)
  4. Paid-Up Additions of insurance
  5. One-year Term (also known as the 5th dividend option)

“CRAP - O”

79
Q

Settlement Options for Life Insurance

LUMP SUM PAYMENT

A

Lump Sum Payment

Pay the lump sum directly int he form of a check to the beneficiary

80
Q

Settlement Options for Life Insurance

INTEREST ONLY

A

Receive periodic payments of interest on the policy proceeds.

81
Q

Settlement Options for Life Insurance

ANNUITY PAYMENT FROM LIFE INSURANCE

A

Fixed Amount - receive fixed payments until depleted

Life Income - converts into annuity contract for the life of the beneficiary

Fixed period - converts into annuity contract for a specified number of yrs

Life Income with Period Certain - transforms the death benefit into a life annuity based on age/health of beneficiary yet promises to make a specified number of payments under the contract

Joint and Last Survivor Income - Annuity payments are made over the joint lives of two individuals

82
Q

Life Insurance Nonforfeiture Options

CASH SURRENDER VALUE

A

Insured receives the accumulated cash value when terminating the life insurance policy (less surrender charges)

83
Q

Life Insurance Nonforfeiture Options

REDUCED PAID-UP INSURANCE

A

Insured receives the cash value in the form of a paid-up policy with a smaller face amount

84
Q

Life Insurance Nonforfeiture Options

EXTENDED TERM INSURANCE

A

The insured receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.

85
Q

ACCELERATED DEATH BENEFITS due to terminal illness

A

Any payments are deducted from the policy’s face value

Life expectancy must be 24 months or less

Income from benefit not taxable

No restrictions on USE.

86
Q

Universal A vs Universal B

A

A: If cash value gets high enough, the death benefit will increase

B: Death benefit varies directly with cash values. More expensive than A because the death benefit is equal to a specified amount of insurance plus the cash value.

87
Q

Direct Recognition Program

A

Dividends are reduced by any outstanding loan against the policy

88
Q

Suicide rule

A

Coverage is excluded if suicide is committed with one or two years of purchasing the policy (premiums returned)

89
Q

Life Annuity Contracts

A

-Periodic payment to individual

-Protection from outliving assets

-Commonly used to fund retirement

-Not a hedge against inflation

-not appropriate if you want to leave assets to your heirs

90
Q

Are dividends earned on cash value taxable?

A

Yes, but not until withdrawn

91
Q

Are loans against life insurance taxable?

A

No, tax free, unless MEC.

92
Q

How are withdrawals from life insurance taxed?

A

Considered a return of principal until accumulated premiums have been distributed.

Then, taxed as ordinary income.

93
Q

Characteristics of Group-Term life insurance

A

Coverage amounts may be based upon salary level

Payout are almost always made in lump sum payment, unless otherwise specifically requested by the beneficiary

The minimum group size is 10, unless specific requirements are met

94
Q

Can a group life insurance plan provided by employers be converted to permanent?

A

Yes, without evidence of insurability

The policy may be converted from a term policy to an individual permanent life policy.

At conversion, the billing is switched to the insured.

95
Q

The only time a viatical company will purchase a life insurance policy is if the insured is

A

Terminally ill or Chronically ill

96
Q

Are premiums paid by the insured tax deductible?

A

NO

97
Q

Chronically ill defined as unable to do at least two Activities of Daily Living. What are the 6 ADLs?

A

Eating
Toileting
Transferring
Bathing
Dressing
Continence

98
Q

Pre August 14, 1982 what method is used for withdrawals prior to the start of an annuity?

A

FIFO

Basis before earnings

99
Q

For contracts dated after August 14, 1982 what method is used for withdrawals prior to the start of an annuity?

A

LIFO

Earnings before basis

100
Q

1035 Exchange, one annuity contract for another, taxable?

A

NO

101
Q

Annuity for life insurance contract, taxable?

A

YES

CFP Exam (23 decks)

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