Insurance

Question 1

Rodney is being admitted to the hospital with a preapproved covered expense for procedures that will cost $12,225. Rodney’s policy has a $300 deductible per person. This deductible must be met by two family members. This requirement has been satisfied already this year. The policy also has a $5,000 coinsurance feature with an 80/20 split. What is the amount the insurer will pay for the procedure that Rodney is about to receive?

Answer 1

If the deductible has been satisfied, then Rodney has only the 20% of the $5,000 coinsurance amount to satisfy (5,000 x 20% = 1,000). This means that the insurer will cover $11,225 ($12,225 - $1,000).

Question 2

The group model of the HMO: Is a corporation and medical staff members including doctors, nurses and clerical staff are employees of the HMO. Is a type of HMO organization that is made up of physicians who have their own office locations. Is an arrangement that is sometimes known as the network model. Has no gatekeeper within the structure of this model.

Answer 2

The group model of the HMO is an arrangement that is sometimes known as the network model. Option “A” describes a staff model. Option “B” describes an IPA. Option “D” is incorrect as ALL HMOs employ gatekeepers.

Question 3

While John is working on his garage roof, he slips, falls off the roof, and lands on the driveway next to the car. John broke his arm in the fall. He should seek to collect and will be successful in doing so from which of his insurance policies? Coverage F, medical payment insurance on his homeowners. Medical pay on his auto insurance. His personal health insurance policy. His extended coverage on his life insurance policy.

Answer 3

Option “A” - Homeowners does not pay for injury to the insured. Option “B” - Medical pay auto pays for the insured if he or she is injured “in, on, or about the covered auto.” Here he was close, but not close enough. His personal health insurance (Option “C”) will pay. C is the answer

Question 4

Which of the following is a mandatory provision for health insurance policies? Grace period and reinstatement. Occupation. Misstatement of age. Suicide.

Answer 4

The correct answer is A. All of the others are optional provisions for life insurance policies.

Question 5

The HMO model under which the subscribers have the greatest flexibility is: The staffing model. The IPA model. The group model. The network model.

Answer 5

The correct answer is B. The IPA (Individual Practice Association) allows the greatest flexibility among HMO coverages.

Question 6

Infographic: Detail the provisions of COBRA

Answer 6

Question 7

Infographic: Detail the types of insurance policies

Answer 7

Question 8

Inforgraphic: Explain the taxation of Life Insurance

Answer 8

Question 9

Infographic: Explain how the transfer of a life insurance policy works

Answer 9

Question 10

Infographic: Explain the types of buy sell arrangements

Answer 10

Question 11

An employer subject to COBRA must provide a covered employee with the option of continuing health insurance coverage in which of the following circumstances?

The employer has terminated its health plan.

The employee has been terminated for incompetence.

The employer has gone out of business.

The employee has been terminated for gross misconduct.

II only.

I and IV only.

I, II and III only.

II, III, and IV only.

Answer 11

Solution: The correct answer is A.

COBRA is extended to those that separate from services with the exception of dismissal for gross misconduct.

Question 12

Karen’s employer has a non-contributory indemnity health plan. The plan has a $250 deductible with 90/10 coinsurance and out-of-pocket limit is $10,000. Karen has the following medical expenses: - $75 for a visit to her family physician - $350 for ultrasound - $3,800 surgeon’s fees How much will Karen have to pay this year?

$647.50

$250

$3,975

$422.50

Answer 12

The correct answer is A.

Karen’s total medical expenses are $4,225 ($75 + $350 + $3,800).

She must pay the deductible of $250 plus

$4,225 - $250 = 3,975 x 10% = 397.50 plus the deductible of $250 = 647.50

Question 13

Which of the following statements accurately describes a fully insured group health insurance plan?

Dismemberment benefits from accidental death and dismemberment coverage (AD&D) are taxable to the employee.

Benefits from a comprehensive medical expense plan are always tax free to the employee.

Death benefits from AD&D coverage are taxable to the employee’s beneficiary if the contract does not meet the definition of a life insurance contract.

Employer-paid premiums are deductible by the employer if the benefits are payable to the employer and are considered additional reasonable compensation.

Answer 13

The correct answer is B.

Option “A” - AD&D benefits are not taxable to the employee or employee’s beneficiaries. Option “C” is false. Option “D” - Premiums are always deductible to the employer, even if it is part of a key-person policy or pays to the employee. In a self-funded plan which is discriminatory, some or all of the benefits may be taxable to key employees.

Question 14

Temporary insurance coverage may be provided by(granted the insured must pass evidence of insurability)?

Answer 14

Conditional Receipt

RFP board states while the conditional receipts set forth certain terms of temporary life insurance coverage, it will not be issued without a completed applicaiton and payment of inital premuim.

Question 15

What is the tax tratment if disability insurance payments are paid by the employer?

Answer 15

Any benefits received will be included in taxable income. Any disability premuims paid by the insured with after-tax dollars, then any benefits receieved will be tax free.

Question 16

If you client owns a life insurance policy that has a DB of 200,000 paid out on the life of the spouse, what would the tax treatment be if the spouse died today, but the child was the assigned beneficiary?

Answer 16

This would be a taxable gift to the son. Relationship is viewed as the unholy trinity. MEaning you have a different owner, bene, and insured. If insured dies, OWNER of the policy has made a a gift.

Question 17

Question from the exam asked which charateritics of insurance are fundamental? I also want you to tell me why

Probability

Law of large numbers

Transfer of risk from individual to group

Insurance is a form of speculation

Answer 17

All of these except specualtion is a fundamental to insurance.

When we think insurance, it is to protect us from PURE risk. Meaning loss or no loss. Speculation desribes a loss and a gain. Insurance will never look to provide you with a gain of your property.

Question 18

What does NAIC have control over relating to insurance?

Answer 18

Honestly, not much. It only provided guidance and recommendations to the state insurance commissioners. NAIC has no actual control over the state insurance regulations.

Question 19

Mini Case: Bill age 35, was diagnosed with a terminal illness, has 6 months left of work and 12-18 months left to live. He has always been self employed, and has never paid soc sec until the last two years.

Given these facts, what benefits will be avaible to bill and his family from soc sec given the disability?

Medicare A

Medicare B

Monthly disability

Lump sum disability

Monthly benefit to spouse

Answer 19

To be eligible for Medicare you MUST be 65 yrs old or disabled for 2 years. He’s not eligible in that regard.

Also, he’s not fully insured. You need 40 quarters of coverage to qualify for disability benefits. Because of this spouse can’t qualify either so none of these apply

Question 20

Mini Case: Carol wants to provide 60% of her salary disability coverage to bobby who is in the 35% tax bracket. Bobby has W-2 wages of 40K and the annual contribution for her qualified profit sharing account on bobby’s behalf is 4K

1. What is the net of tax monthly disability payment if carol pays the premuim and bobbys tax bracket remains 35%
2. What is the net of tax monthly disability payment if bobby pays the premuim and bobbys tax bracket remains 35%

Answer 20

1. 40,000/12= 3,333

3,333(0.60)= 2,000

2,000(1-0.35)= 1,300 net of taxes

2. 40,000/12= 3,333

3,333(0.60)= 2,000

If employee pays premuim then any benefit is tax free

Question 21

An H0-3 policy with no endoresements excludes which of the folllowing perils?

Flood

Fire

Collapse

Weight of ICe

Volcanic Eruption

Answer 21

Flood. This will never be included. Always must purchase another policy to cover flood damage

Question 22

Describe an absolute vs a collateral assigment

Answer 22

In an absolute, the policy ownership rights are permanetly transfered.

With a collateral, only a portion of the rights of the contract are assigned, until an obligation is fulfilled. The rights of the contract will then revert back to the owner.

Question 23

Desribe insurable interest and how it relates to transfering policies

Answer 23

It must exist at the time of the policy inception for life insurance. Not needed at the time of loss.

The policy can be issued to anyone with insurable interest

Question 24

What does a private medical policy and Medicare not cover?

Answer 24

CUSTODIAL CARE! This is needed for anyone who cannot pefrom 2 of the 6 ADLs

Also, another point that came up is that Medicare does not provide a stop loss(Drug coverage is only in Part D or C)

Question 25

A client purchased a new home from a builder for 150K (including the lot value of 40K). What is the minimum amount of coverage you would recommend to cover the replacement of the house in the event of a loss?

Answer 25

88K

This is because you want have 80% of the replacement cost covered this is the minimum. The house was only worth 110,000 so you would just need to cover the repalcment of that not the land

Question 27

What do the non-forfeiture rights grant in an insurance policy?

Answer 27

It’s a provisions to make sure the money paid into an insurance policy will not be absorbed by the insurance company if the insured terminates benefits. This protects your cash value within the policy

Question 28

What power does an irrevocable beneficiary have in a life insurance policy?

Answer 28

They have the same rights as the policy owner! This prevents the owner/insured from taking a loan or making any changes with the policy unless they have permission from the bene

Question 29

When will the benefits trigger in a long-term care policy?

Answer 29

1. If the individual isn’t allowed to do 2 of the 6 ADLs
   - Dressing
   - Eating
   - Bathing
   - Transferring
   - Toileting
   - Continence
2. The benefits may also be triggered by severe cognitive impairment that will require this care to protect their health

Question 30

Dave is 46, married, and has an annual salary of 60K. Employer offers group term that is 2 times his salary. The employer cost for dave is .40 per 1000 of which dave pays .08 per month per 1000. The section 79 rate for 45-49-year-olds is .15 per 1000. What additional income must Dave include in his taxable income this year resulting from the group term insurance?

Answer 30

So to start this calc we must remember that the first 50k is tax free when discussing the taxation of life insurance premiums.

Currently, Dave is paying 115.20. Given that 120,000 is the coverage. We must divide 1,000 to get 120 units. Multiply that by .08 and you get 9.6 *12.

To calc the section 79 cost we start by deducted the 50K. So 70K then divide by 1000 we get 70 units. Multiply this by .15 = 10.50*12 months = 126 taxable to Dave. But we MUST deduct we he is already paying so we get this as our answer:

$10.80

Question 31

Client asks you to explain the statement “life insurance proceeds are tax-free” it’s subject to exceptions but the general rule for a bene is that it will be income tax free but:

May be subject to estate taxes in the estate of the insured if the insured owned the policy

May be subject to income taxes if the policy was sold to a third party

Not if the contract was modified at purchase

Answer 31

The first 2 are the correct answer. You know it;s going to be included in the gross estate. But remember if you are selling the policy to a third party that is an outside interest so it will be viewed as a transfer for value which is taxable

Question 32

What are paid-up additions in an insurance policy?

Answer 32

Due to rating It’s a dividend option that creates an inexpensive way to add coverage without concern to health risk or rating.

Question 33

Jerry has a whole life policy that is 125K purchased 15 years ago. He has paid premiums of 2k per year for the past 15 years. The policy has a cash surrender value of 40K. Over the years, the policy has paid cash dividends to jerry. Since inception the dividends = 5K. Jerry has decided to cancel the policy, what is the tax treatment?

Answer 33

So Jerry has paid 30K in premiums over the past 15 years. His basis is 30K, BUT he received 5K back in dividends. So this makes the new basis 25K. Because he is getting 40K back, the difference of 15K will be a gain treated as ordinary income.

Question 34

What is a direct Recognition Program?

Answer 34

They are described as follows: Any amount of cash that is removed from the policy is reflected in a decrease in the amount of dividends and int paid on that policy.

With a direct recognition policy, when you borrow money from your policy the insurance company first subtracts the amount of the loan from the cash value, the calls the dividend on the lesser amount.

Example: you have 100K but take a 10K loan. The dividend will be based on 90K amount

Question 35

Explain Risk Transfer. Now break down the table for me now that you already eliminated 1

Answer 35

It is the use of insurance. This should be done in the event of high severity (catastrophic) and low frequency losses that would wipe out ones financial resources

Low Frequency High Frequency

Low Sev. Retention Reduction(non-insurance transfer)

High Sev. Insurance Avoidance (catastrophic risk)

Question 36

What is policy persistency?

Answer 36

It is policy retention. It’s basically the study of how long someone will continue to pay for their current policy given the number of renewals year after year.

Policies remaining with the company (not paid out) are a benefit to the insurance company.

Question 37

What does inland marine insurance provide?

Answer 37

It provides protection against losses of property to goods in transit(shipped by the seller but not received by the buyer). For example, wouldn’t include the hull of the ship

Question 38

What do the split limits amounts in insurance liability policies stand for

Answer 38

The first number will be by per person, the second is the full liability is covered. It’s per person/per accident

Question 39

Based on common law, both parties are to blame. Even if the fault is 90% 1 person and 10% the other. What is the term for this provision?

Answer 39

Contributory Negligence. Was created to prevent frivolous lawsuits.

Question 40

What is medicare advantage?

Answer 40

It functions as an HMO, PPO, and POS plan. Meaning it will cover vision, dental, and hearing that are not covered under part A and B of medicare

Question 41

What definion of disability is used under the social secuirty disability income plan?

Answer 41

ANY OCCUPATION