Finance Final Exam Flashcards
Chapters 14-24
An _____ is a periodic payment that continues for a fixed period or for the duration of a designated life or lives.
annuity
______ creates an immediate estate and provides protection against dying too soon before sufficient financial assets can be accumulated
Life Insurance
An _____ provides protection against living too long (often called excessive longevity) and exhausting your savings while you are still alive.
Annuity
The fundamental purpose of an ______ is to provide a lifetime income that cannot be outlived. It protects against the loss of income due to excessive longevity and the exhaustion of savings.
Annuity
A _____ annuity pays periodic income payments that are guaranteed and fixed in amount; the first payment is due one payment interval from the date of purchase.
Fixed Immediate Annuity
Identify the annuity settlement options that are typically found in a fixed annuity.
- Cash or guaranteed installment option
- Life annuity (no refund)
- Life annuity with period certain
- Installment refund option
- Inflation annuity option
An ________ annuity is a fixed, deferred annuity that allows the annuity owner to participate in the growth of the stock market and also provides downside protection against the loss of principal and prior interest earnings if the annuity is held to term.
equity-indexed annuity
There is always the risk that you will run out of money at an advanced age and still be alive. To deal with the risk of exhausting your financial assets at an advanced age, some insurers have designed ______ products. ______ are low-cost annuities because there are no cash values or death benefits in the policy.
Longevity Annuity
Explain the eligibility requirements for a traditional IRA.
- the participant must have tax-able compensation during the year.
- the participant must be under age 70 1/2
What are the annual contribution limits to an IRA?
For 2015, the maximum annual contribution is $5,500 or 100 percent of taxable compensation, whichever is less.
Older workers age 50 and over can contribute an additional $1,000, or a maximum of $6,500.
A _______ is an IRA that allows workers to take a tax deduction for part or all of their IRA contributions. The investment income accumulates income-tax free on a tax-deferred basis, and the distributions are taxed as ordinary income.
Traditional IRA
Although annual contributions to a ______ are not tax deductible, the investment income accumulates income-tax free, and qualified distributions are not taxed if certain requirements are met.
Roth IRA
What is an IRA rollover?
A rollover is a tax-free distribution of cash or other property from one retirement plan, which is then deposited into another retirement plan.
What are the age limits on Traditional IRA vs Roth IRA?
Traditional: Under age 70 1/2
Roth: No Age Limit
What are the contribution limits on Traditional & Roth IRAs?
$5,500 (6,500 age 50 and older) for both Traditional and IRA
How are the tax on distributions done for Traditional and Roth IRAs?
Traditional: Taxed as ordinary income, no tax on nondeductible contributions
Roth: Distributions are tax-free if you meet certain conditions
The person who receives the payments is the _____
Annuitant
Annuity payments consist of what three sources?
- Premium payments
- Interest earnings
- Unliquidated principal of annuitants who die early
_____ use special mortality tables to calculate annuity premiums because annuitants tend to be healthy individuals
Actuaries
A ______ annuity is an annuity purchased with a lump sum
single-premium immediate annuity
During the ______ prior to retirement, premiums are credited with interest
accumulation period
The _______ is the minimum interest rate that will be credited to the fixed annuity
guaranteed rate
The _____ is based on current market conditions, and is guaranteed only for a limited period
current rate
A _______ pays a higher interest rate initially
bonus annuity
The______ is the period in which funds are paid out, or annuitized
liquidation period
A _______ pays periodic income payments at some future date
deferred annuity
A ______ is purchased with a lump sum, but income is deferred until some future date
single-premium deferred annuity
A_______ allows the owner to vary the premium payments
flexible-premium annuity
A________ begins paying benefits only at an advanced age, such as age 85
longevity annuity
Under a_______, the income payments terminate when the death of the first covered person dies
joint annuity
A _______ pays benefits based on the lives of two or more annuitants
-The annuity income is paid until the last annuitant dies
joint-and-survivor annuity
- A ______ option provides a life income to the annuitant only while the annuitant remains alive
- A _______pays a life income to the annuitant with a certain number of guaranteed payments
- life annuity (no refund) option
- life annuity with guaranteed payments
An _____ pays a life income to the annuitant; after the annuitant’s death, payments continue to a beneficiary until they equal the purchase price
installment refund option
A ______ pays the beneficiary a lump sum
cash refund option
An ______ option provides periodic payments that are adjusted for inflation
inflation-indexed annuity option
Some insurers now make available riders that allow annuitants to make a _______
partial cash withdrawal
A ______ pays a lifetime income, but the income payments vary depending on common stock prices
variable annuity
What is the purpose of a variable annuity?
- The purpose is to provide an inflation hedge by maintaining the real purchasing power of the payments
- Premiums are used to purchase accumulation units during the period prior to retirement
- At retirement, the accumulation units are converted into annuity units
Variable annuities contain the following fees and expenses:
- Investment management charge
- Administrative charge
- Mortality and expense risk charge
- Surrender charge
The ______is the percent of increase in the stock index that is credited to the contract
participation rate
Advantages to longevity annuities include:
-Benefits kick in when other financial assets are likely to be exhausted
-They are generally less expensive than traditional -immediate annuities
They can be purchased with an inflation hedge
Disadvantages of longevity annuities include:
- Your heirs will lose money if you die during the deferral period
- Once purchased, your funds are locked up
An individual annuity purchased from a commercial insurer is a _____
non-qualified annuity
Characteristics of non-qualified annuity:
- It does not meet IRS code requirements
- It does not qualify for most income tax benefits
- Premiums are not income-tax deductible
- Investment income is tax deferred
- The net cost of annuity payments is recovered income-tax free over the payment period, but the amount that exceeds the net cost is taxable as ordinary income
An exclusion ratio is used to determine the taxable and nontaxable portions of the payment. What is the exclusive ratio?
Exclusive Ratio = investment in the contract / expected return
The I R A can be set up as either:
- An individual retirement account
- An individual retirement annuity
Describe briefly the major healthcare problems in the United States
- rising healthcare expenditures
- large number of uninsured in the population
- considerable waste and inefficiency
- harmful insurer practices
A _______is a tax-exempt or custodial account established exclusively for the purpose of paying qualifying medical expenses of the account beneficiary who is covered under a high-deductible health insurance plan.
health savings account
There are two components of a HSA:
- a high-deductible health insurance policy that covers catastrophic medical bills and
- an investment account from which the account holder can withdraw money tax-free for medical costs.
_____(also called reimbursement policies) are the most common. These policies pay a daily or monthly benefit limit for covered expenses incurred for long-term care up to the policy limits.
Expense-incurred policies
_____ (also called per diem policies): pay a flat dollar amount per day regardless of your actual long-term expense.
Indemnity policies
_____ (also called hybrid policies): Some include coverage for certain long-term care expenses
Life insurance and deferred annuity policies
Triggers to become eligible for benefits of long term care insurance
- requires the insured to be unable to perform a certain number of activities of daily living
- insured needs substantial supervision to be protected against threats to health and safety because of severe cognitive impairment
- medical necessity trigger: benefits can be paid if a physician certifies that long-term care is needed even if the insured does not meet any of the triggers described
Explain the various definitions of disability that are found in disability-income insurance.
- Inability to perform the material and substantial duties of your regular occupation
- Inability to perform the material and substantial duties of your occupation, and are not engaged in any other occupation
- Inability to perform the duties of any occupation for which you are reasonably fitted by education, training, and experience
- Inability to perform the duties of any gainful occupation
- Loss-of-income test
____means that you are gainfully employed and not totally disabled but, solely because of sickness or injury, your loss of income is at least 15 percent of your prior income.
Residual Disability
The ____ is the length of time that disability benefits are payable after the elimination period is met. The insured has a choice of benefit periods, such as 2, 5, or 10 years, or up to age 65 or 70.
benefit period
Individual policies normally contain an _____, during which time benefits are not paid. Insurers offer a range of elimination periods, such as 30, 60, 90, 180, or 360 days.
elimination period (waiting period)
If the insured is totally disabled for 90 days, future premiums will be _______as long as the insured remains disabled.
waived
Explain the meaning of a preexisting condition:
a physical or mental condition that existed during some specified time period prior to the effective date of the policy.
Reasons for the increase in spending include:
- Advances in technology
- Cost insulation because of third-party payers
- Employer-sponsored health insurance
- Fee-for-service defects
- High administrative costs
- Lack of transparency in cost and quality information
- Cost shifting by Medicare and Medicaid
- Rising prices in the healthcare sector
- Defensive medicine
_____ protects an individual or family for covered medical expenses because of sickness or injury
Individual medical expense insurance
A ______states a percentage of the bill in excess of the deductible, which the insured must pay out-of-pocket up to some maximum annual dollar limit
coinsurance provision
A______ is a flat amount the insured must pay for certain benefits, such as an office visit or generic drug
co-payment
The insured’s total out-of-pocket spending is limited by an ____, after which the insurer pays 100 percent of eligible expenses
annual out-of-pocket limit (also called a stop-loss limit)
A ______provides covered medical services to the members in a cost effective manner, with heavy emphasis on cost control
managed care plan
The most popular plan today is a ______.
This contracts with physicians, hospitals, and other health-care providers to provide covered medical services to policyholders at discounted fees
preferred provider organization (PPO)
____policies are the most common type of LTC insurance policies
Expense-incurred (or reimbursement)
Some states have _____designed to reduce Medicaid expenditures by eliminating or reducing incentives of some people to rely on Medicaid to pay for long-term care
long-term care partnership programs
Explain the typical eligibility requirements that employees must meet in group insurance plans.
- Be a full time employee
- Satisfy a probationary period (if any)
- Apply for insurance during the eligibility period
- Be actively at work when insurance becomes effective
____are nonprofit organizations that receive favorable tax treatment and are regulated under special legislation. To raise capital and become more competitive many of these plans have converted to for-profit status, with stock-holders and a board of directors.
Blue Cross and Blue Shield plans
Under the _____ self-insured plans generally are not subject to state regulation. Thus, a national employer does not have to comply with laws in 51 jurisdictions.
Employee Retirement Income Security Act of 1974 (ERISA),
_____ are exempt from state laws that require insured plans to offer certain state-mandated benefits
Employer Self-insured plans
_____ is an organized system of healthcare that provides comprehensive medical services to its members on a prepaid basis.
Health Maintenance Organizations (HMOs)
_____ is a plan that contracts with healthcare providers to provide certain medical services to the plan members at discounted fees.
Preferred Provider Organizations (PPOs)
_____ plan is a managed care plan that combines the basic characteristics of an HMO and a PPO, but members have the option to select care outside the network. If patients receive care from network providers, they pay substantially lower out of pocket expenses
Point-of-Service Plans (PoS)
Identify the major provisions of the Affordable Care Act that affect individuals, families, and employers.
- Certain Insurance Acts are prohibited
- Employer-shared responsibility (50 or more employees they must offer health insurance)
- Small employer tax credits
- SHOP Marketplace program for small business firms
- Required minimum medical loss ratio
- Grandfathered plans
- Flexible spending account limits
- out of network claim payments for emergency room visits
- Uniform coverage documents
- Cadillac tax on high-value policies
- Employer w-2 reporting obligations
_____ allow employees to select those employee benefits that best meet their specific needs. Instead of a single benefits package that applies to all employees, they allow employees to select among various group life, medical expense, disability, dental and other plans that are offered.
Cafeteria plans
_____are employer-sponsored benefits, other than wages, that enhance the economic security of individuals and families and are partly or fully paid for by employers
Employee benefits
- Group life, medical and dental insurance
- Group short-term and long-term disability plans
- Paid holidays, vacations, family and medical leave
- Educational assistance, employee discounts
Employee Benefits Examples
Group insurers observe certain principles:
- The group should not be formed for the sole purpose of obtaining insurance
- There should be a flow of persons through the group
- Benefits should be automatically determined by a formula
- A minimum percentage of eligible employees must participate
- The plan should be easy to administer
Some Group life insurance plans have a _______ that allows the coverage to continue if the employee leaves
portable term insurance option
_____is an employee benefit that pays the cost of hospital care, physicians’ and surgeons’ fees, and related medical expenses
Group medical expense insurance
There are several types of HMOs:
- Staff Model
- Group Model
- Network Model
- Individual Practice Association (IPA)
Type of HMO: physicians are employees of the HMO and are paid a salary or a salary and an incentive bonus to hold down costs
staff model
Type of HMO: physicians are employees of another group that has a contract with the HMO
group model
Type of HMO: the HMO contracts with two or more independent group practices
network model
Type of HMO: is an open panel of physicians who work out of their own offices and treat H M O members at reduced fees, on a fee-for-service basis
An individual practice association (IPA)
The Affordable Care Act prohibits certain practices:
-Applicants cannot be turned down or rated up regardless of their health condition
-Prohibition on preexisting conditions
-Prohibition on lifetime and annual limits
-Insurers may not retroactively rescind a policy because of unintentional errors on the application
-Retention of coverage until age 26
-No cost sharing for certain preventive services
-An employer mandate requires large firms to offer health insurance or pay penalties
-Health insurance plans must provide essential health benefits
-Small employer tax credits
-The SHOP Marketplace program enables small firms to offer high-quality health and dental coverage
-Required minimum loss ratio
-Grandfathered plans
Flexible spending account limits
-Out-of-network claim payments for emergency room visits
-Uniform coverage documents
-Cadillac tax on high-value policies
-Employer W-2 reporting obligations
A_____ is a generic term for a plan that combines a high-deductible health plan with a health savings account (H S A) or health reimbursement arrangement (H R A)
consumer-directed health plan
A _____ provision specifies the order of payment when an insured is covered under two or more group health insurance plans
coordination-of-benefits provision
The ______ gives employees the right to remain in the employer’s plan for a limited period after leaving employment
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
The ___placed restrictions on the rights of insurers to limit coverage for preexisting conditions
Health Insurance Portability and Accountability Act (1996)
