Insurance Flashcards
Split Dollar Plan
Insurance where an employer and an executive share costs and benefits of a life insurance policy
- EndoRsement Method:
EmployeR owns the policy and has the responsibility for premium payment. Employee’s share of the business is secured through its ownership of the policy. A beneficiary is named to receive employer’s share of death proceeds
2.Collateral Assignment Method:
Insured employee is the policy owner. Corporation lends the employee the corporation share of the annual premium and the loans amount are secured by the assignment of the policy to the corporation. Corporation receives its benefits as assignee of the policy at earlier of employees death or termination of split dollar plan
Buy-Sell Agreement
Arrangements for sale of individuals interest in business due to death or disability. Usually funded by life insurance
Stock Redemption/Entity Purchase
- Ideal with multiple owners
- Corporation is the owner and beneficiary of policies on the lives of shareholders
- Life insurance CAN be attached
- No step up in basis, large gain upon selling
Cross-Purchase/Stockholder Purchase
- Ideal with few owners
- Life insurance required by each shareholder on lives of other shareholders
- Step-up in basis on purchased shares
- Gain is FMV of company less basis plus shares purchased
Guidelines for Risk Management
High Loss Severity, Low Loss Frequency, most suitable technique is RISK TRANSFER (Insurance)
High Loss Severity, High Loss Frequency, most suitable technique is AVOIDANCE (Insurance premiums would be prohibitive)
Characteristics Of Insurable RIsk
Large number of homogenous exposure units
Loss must be definite and measurable
Must be fortuitous or accidental
Must NOT be catastrophic (to insurer)
Reduction
Sprinkler system, safety programs
Retention
Recognizes the risk and assumes losses through dedutctibles or co-insurnace
Transfer
insurance, subcontracting waivers
Insurabile Interest
Property and Casualty
Must be present at time of inception AND of claim (like owning a building). In addition, the insured cannot transfer the contract to someone else. Normally a new contract is issed
Insurable Interest
Life Insurance
Be ONLY at the time of inception. Need not be present at time of death. After the contract is issued, contract can be issued to anyone. No insurable interest requirement. Form must be submitted to the company after which they would acknowledge the change
Subrogation
Gives the insurer all rights the insured possessed against negligent third parties. It is a process of subsitution; the insurer takes over the legal rights of the insured that existed at the time of the loss
Unilateral
Only one party is bound; the insured makes no promise
Adhesion
Contract is accepted “as is”. It is not negotiated
Waiver provisions
Only the president, vice president, secretary, etc. may alter the contract. It must be accepted “as is”
Aleatory
Number of dollars given up is unequal. Outcome is uncertain;gambling
Parts of Insurance Contract
DDICE
Declaration page - factual statements that identify the specific person or property
Definitions - explanation of key policy terms
Insuring agreements - the basic promise of the insurance company
Conditions - the duties and rights of both parties
Exclusions- circumstance when the insurer will not pay
Tort/Unintentional Tort
Tort is wrongful act other than a breach of contract for which a civil action may be brought against the tortfeasor
Unintentional tort is negligence or carelessness
Attractive nuisance
A situation in which a high degree of care is imposed on the land occupier for certain conditions
Negligence per se
A situation where the standard of care is set by a statue. Ex. School zone, crosswalk, ect
Absolute Liability
An extra hazardous condition which results in losses to others. Ex. Keeping of wild animals, blasting, etc. Works compensation reflects absolute liability
Strict Liability
Is generally limited to manufacturers and distributors of defective products
Ex. Firestone tires, Ford Motor Company, Merk, ect.
Vicarious Liability
Occurs when one person is held liable for the negligent behavior of another person
Ron Matonti
Life Insurance Needs Analysis
Capital Utilization Approach
Uses Annuitization to provide needed income but leaves no money at the end of the presumed term
Case examples:
Will give emergency fund need, educational need, will ask the dependent needs, blalckout period needs, and retirement year needs.
If the client owns X amount of existing life insurance, how much additional life insurance is needed?
Will be the difference of needs and existing insurance
Human life value
Based on income-earning ability. It is the present value of the income lost by dependents as a result of the insured’s death. It does not consider other resources available to provide for income and cash needs because of an individuals premature death.
Capital needs approach/ Capital retention/interest only
Factors interest only, so the original capital is still left at the end of the income period
Calculation:
Income need/ (difference between inflation and assumed rate of rate)
+ beginning of year 1 money
Participating Policy
Pays annuall dividend
Charges larger premiums (will overcharge)
If extra premium is not used, it is returned to the polocyholders as a policy dividend (usually tax free)
Dividends are based on higher-than-expected investment return and/or lower-than-expected mortaility and expenses
Nonparticipating policy
Company retains the profits for its shareholders
Insurance Company Ratings
A.M. Best. A++ to F
(Provides detailed, historical data on insurance carriers)
Standard and Poors AAA to CCC
(Provide Ratings)
Insurance Contract
Offer and acceptance / legal object / legal form
Consideration
Something of value is exchanged (usually money)
Competent parties
Principal must have legal capacity to execute contracts
1. Incompetent or intoxicated adults have limited or no capacity to execute contracts
2.Minors have capacity to contract for necessities (ex. Food, clothing, shelter) only.
Agency
Express authority
Written, explicit direction from principal (the insurance company) to the agent. The agency agreement (contract)
Agency
Implied Authority
Is that which the public believes the agent holds and includes the signage, rate books, etc. Implied authority enables the agent has to carry out the principal’s busienss
Agency
Apparent Authority
A rise out of negligence of the principal in allowing the agent to appear to have the authority because of certain actions of the agent in the past. This typically aggects terminated agents
Homeowners Insurance
Coverage A - Adobe - covers dwelling and attached structures plus construction materials
Coverage B - Buildings - covers structures separated from the dwelling by a clear space (garage)
Coverage C - Contents - covers contracts and personal property owned or used by any insured while anywhere in the world. Boats and trailers are limited to $1,000
Coverage D - ‘dditional demnity - covers loss of use coverage, provides indemnity for the necessary increase in living expenses incurred by the insured to continue the insured’s normal standard of living
Coverage E - Enemies - Comprehensive liability insurance
Coverage F - First Aid - medical payments to others, not the insured’s family members
Exclusions under Coverage C (personal property coverage)
- Animals, birds, or fish
- Motorized land vehicles (not riding lawn mower) and aircraft
- Property of roomers, boarders, and other tenants (needs HO-3 renter’s policy)
- Property contained in an apartment regularly rented or held for rental to others by the insured (unless specifically endorsed)
Perils Covered
Basic
WHARVES/FLT
Windstorm, Hail, Aircraft, Riot, Vandalism, Vehicles, Explosion, Smoke, Fire, Lightning, Theft
Perils
Broad Form
WHARVES/FLT/RAF
Rupture of a system, Artificially generated electricity, Falling objects, Freezing of plumbing
Exclusions applied to all homeowner forms
Ordinance or law, earth movement (earthquake), water damage (flood), power failure, neglect, war, nuclear hazard, intentional loss.
Sinkhole is a covered peril for the exam
Replacement cost coverage
Replacement cost applies only to buildings
Personal property is covered for its actual cash value
ACV (only used when depriciation is given AND amount of dwellling is 80% or under. If it is use higher of ACV or replacement cost formula)
Replacement cost x depriciation less deductible
Replacement cost formula : (always use when dwelling insurnace is 80% or over)
Coverage/replacement cost = required insurance
Replacement cost x coinsurance = insurance required
Insurance carried/insurance required x loss - deductible
Scheduled personal property endorsement floater
Used for jewlery, cameras, coin collections
Property coverage is on a valued basis
Ex. A diamond ring is appraised and insured for $10,000 (valued)
Requirements to be covered under PAP (personal auto policy)
Be owned by an individual or by spouses living in the same household
Be a private passenger automobile
Not be used as a public or livery conveyance (a vehicle hired out to carry persons or property)
not be rented to others
PAP
Part A
Liability Coverage (BI/PD)(Bodily Injury/Property Damage)
Vehicles in business not covered (would need commercial policy)
Important for wealthy client
PAP
Part B
Medical Payments (med-pay) coverage
Important for unemployed
Will pay reasonable expenses incurred by necessary medical/funeral services
Will pay only those expenses incurred within 3 years of the date of the accident
PAP
Part C
UM (Uninsured Motorist Coverage)
Important for wealthy clients
The agreement promises to pay the amount an injured insured could have collected from the uninsured driver if they carrier auto liability insurance
Important* this is liability insurance, not medical
PAP
Part D
Physical Damage Insurancing Agreement of the Personal Auto Policy
Collision: the upset of your covered auto or its impact with another vehicle or object
Other than Collision (comprehensive/comp protection) : Think of this as an open perils type of policy .. applies to all losses except those specifically excluded (breakage of glass, loss caused by missiles, falling objects, fire, theft, larceny, explosion, earthquake,windstorm,hail,waer,flood,malicious mischief or vandalism, riot, or civil commotion, and contact with birds of animals)
Malpractice
Generally appropriate where the professional’s substandard conduct may result in bodily injury, physicians or dentists
Errors and Omissions
Appropriate where professionals substandard conduct may result in property damage. Such situations include damage to intangible property, such as loss of money. Lawyers, insurance agents, stockbrokers, and financial planners should carry
Workers Compensation
Benefits are received income tax free
No limit on time or money. This included occupational disease benefits. Not subject to deductibles or coinsurance
Disability income with very short waiting period (days). Benefits are limited
Death benefits are paybale to family members
Rehabilitation benefits include medical rehab as well as vocational rehab
Medicare Part A
65+ and are entitled to monthly SS or railroad retirement program cash benefits
All disabled benes receiving SS disability beneifts for at least 2 years
- Hospital care
- Care in nursing home or extended care facility
- Home health services
- Care in hospice
Patient must pay cost for first 3 units of blood in calendar year or have blood donated by the patient or someone else
Medicare Part B
Voluntary program
- Physicians services
- Home health services
- Diagnostic test
- All outpatient services of a participating hosptial
Patient pays the deductible, no stop loss
Medicare Part D
Drugs
Must have A and/or B coverage plsy pay a premium to obtain this coverage. Can buy later at increased premiums
EXCLUSIONS
Foot Care, eye care, glasses, hearing aids, dental work
Emergency care outside the US
Medicare - skilled nursing home care
Pays all of the first 20 days of skilled care and everything over a specificed amount per day (185.50) for the next 80 days of skilled care (maximum of 100 days). After the 100th day, patient will pay the full cost.
This limited benefit is subject to substantial restrictions.
Pays for skilled care only/Admission to a nursing home must follow within approximately 30 days of a hospital stay of three days or more. Condition must be expected to improve (this, not Alzheimer’s)
Medicare supplement/Medigap policies
Basic benefits typically include
Reimbursement for the insured’s share of hospital expenses (Medicare Part A)
Reimbursement for the insured’s 20% share of expenses (Medicare Part B)
COBRA
Small companies (fewer then 20 employees for at least half the year of the prior year) are exempt from federal legislation.
19 full time and 4 half time, 15 covered under the companies health plan.. 15 that are covered will be covered by COBRA
part timers are different from half time be careful
COBRA is based on the # of employees, not covered employees under the plan
COBRA covers dental and vision
Disability coverage NOT covered
HSA
Mere eligiblity for Medicare doesn’t preclude HSA contributions. However, an individual, once enrolled in Medicare Part A and B may not contribute to an HSA
Only certain insurance premiums such as COBRA and qualified long-term care insurance are qualified medical expenses
Health reimbursement arrangement (HRA)(ONLY C CORPS CAN USE)
Soley employer-funded
Reimbursements for substantiated medical expenses up to a maxmium amount per coverage period.
Ex. It can reimburse for out of pocket costs of an HDHP
Toal Disability
The inability of the insured to engage in his or her own occupation
Modified any occupation/modified own occupation
Harder to claim benefits
Unable to engage in any occupation for which he/she is qualified through training, education, experience
Certian poliicies use the 1st definition for some years, and then second definition after. This is known as split definition
Loss of Income
Pays benefits based on economic loss following a physical disability. Partial disability is covered
Pressumptive disability
Disability policies generally provide that full benefits will be paid if the insured loses his or her sight, speech, both hands, both feet, or one hand and one foot.
SOME POLICIES DO NOT COVER ALL OF THE LOSSES LISTED. SOME REQUIRE THE LOSS TO BE TOTAL AND PERMANENT WHILE OTHERS MAY COVER EVEN A TEMPORARY LOSS
Non-cancellable “noncan”
Continuous term policy guaranteeing the insured’s right to maintain the polocy AT THE STATED PREMIUM
Guaranteed renewable
Continous right to maintain the policy, but the insurer may increase the premium by class of insureds. Guaranteed renewable policy is LESS EXPENSIVE than a noncan polocy because the insuere may increase the premium for the guaranteed renewable policy later
Provisions
Residual benefits rider
Benefits are proportional to the amount of income lost and payable for the same duration as the policy’s maximum benefit period
Provisions
Partial disability rider
Benefit usually is 50% of the total disability benefit; the maximu payment period is limited (3-6 months) while the insured recuperates
Provisions
Disability waiver of premium provision
This provision may waive premiums if the insured policyholder becomes totally disabiled and the disability lasts for some specified minimum period (90 days or longer). NOTE: Most individual disabilty policies include waiver of premium, but NOT ALL. EX. Group disability policies do not have waiver
Social insurance subsitute benefit ((extra benefit until Social Security Pays)
Fot total disability, the monthly benefit will be equal to the social insurance subsitute (SIS) benefit shown on the policy schedule page less any Social Insurance benefit received in that month
Taxation
Under Bonus arrangement like Section 162 disability insurance)
Premiums are deductible by the employer as a bonus. Employee recognizes premiums in income
Benefits are tax free to the employee
Taxation
Employee owns the contract and Employer pays the entire premium under a salary continuation plan (group plan)
Premiums are deductible by the employer. Paid with pre tax dollars
Benefits are entirely taxable to the employee
Partnership and S Corporation shareholders taxation rules are more complicated
A partnership or S CORPORATION CAN deduct the premium paid for coverage for a partner or a great-than-2% shareholder of an S Corporation. The deduction is based on the premium cost being included in the taxable income of the partner or shareholder (conduit income). DIsability insurance benefits are then EXCLUDABLE from taxable income (employee pays the premium)
Long-term care insurance (individual)
Premiums and benefits (tax qualified)
For taxable years after 1996, premiums paid and unreimbursed expenses for qualified long term care services are DEDUCTIBLE as itemized medical expenses. In addition, the deductions are subjeect to the 7 1/2 of AGI floor. Benefits received are generally not taxable subject to the dollar caps. The deduction (2021) is subject to dollar amount limitations based on age Self employed health insurance deduction - for a long term care policy, part of the premium is deductible (depending on age from above) on the 1040
** important to know that the potential deductible dollar amount is limited by age***
NTQ (Non-tax qualified) / traditional long term care insurance
Often includes a “trigger” called a “medical necessity” trigger. A doctor must certify that the patient needs care and the policy will pay. THE PREMIUMS ARE NOT DEDUCTIBLE
Partnership Qualified Long Term Care Insurance Policies (PQs)
This program is a partnership between a state, insurance company and state residents who buy policies. With a PQ, and individual can apply for Medicaid with “asset disregard” (also called dollar for dollar). This allows the applicant to keep assets that would otherwise be disallowed under Medicaid rules
Section 1035 exchanges
Life to Life
Life to Annuity
Annuity to Annuity
Life insurance and annuities may now be exchanged tax-free for a qualified long-term care policy or for a life insurance policy with a long term care benefit
1035 CANNOT BE DONE IF THE INSURED CHANGES. BE CAREFUL ON THE EXAM
Option B life insurance
CV and death benefit is included in his estate
Provisions - Life Insurance
Incontestable
After 2 years, the validity of a contract cannot be questions (excpetion: fraud)
Provisions - Life Insurance
Suicide clause
If within 2 years the insured dies by suicide, the amount payable by the company shall be the premium paid
Provisions - Life Insurance
Grace period
Number of days allowed for premium in default
Designed to keep policy in force
Provisions - Life Insurance
APL provision
(Automatic premium loan - applies to whole life only)
If the insured does not pay the premium by the due date, the company automatically will pay the premium and charge it against the cash value of the policy
Designed to keep the policy in force
Provisions - Life Insurance
Reinstatement
provides for a policy to be reinstated within a specified time period after the date of premium default
(WITH PROOF OF INSURABILITY)
Provisions - Life Insurance
Conversion
Exchange term for a premanent-type plan without having to prove evidence of insurability
Riders - Disability waiver of premium
Extra premiums apply
Whole Life Policy
Company agrees to waive all premiums due after the policy owner has become totally and permanently disabled
Riders - Disability waiver of premium
Extra premiums apply
With Universal and Variable Universal Life Policies, 2 choices
- The company just waives the charges for mortality and administration expenses but does not include an increment to the policy’s cash value
- The company waives the full premium that the client would normally pay
Dividend options for Life Insurance
Cash Reduced Premium Acumulated with interest Paid-up additions One-year term (5th dividend)
Settlement options for life insurance(other than cash, these are annuity options)
Cash Pure life Refund Period certain and life Specific period Specified income
Some who needs CPR, Probaby Safe Sucker
Nonforfeiture options for life insurance
Cash
Extended term/Paid up term
Paid-up reduced amount
CEP (accountant j murph, he aint payin)
National Association of Insurance Commisioners (NAIC)
applies only to non-variable life insurance policies
Model regulation
Copies of illustration must be sent to the insurer along with the policy
Copies of the illustrations must be signed by the applicant and by the agent
Polocy cannot be represented as anything other than a life insurance policy
Model prohibits the user of the term “vanish” or “vanishing premium”
Illustration Must Include (must be labeled “life insurance illustration”)
Name of insurer
Name and address of producer
Name, age, sex of the proposed insured
Initial death benefit, underwriting and rating classification
Viatical Settlement
Causes a transfer for value
Benefits in excess of basis (plus premiums paid) is subject to ordinary income tax to viatical company upon participants death
Life settlements
Describes a transaction involving an insured who is not terminally or chronically ill and is generally over 65. Since the settlement is not made to a terminally ill person, the particpants in a life settlement transaction are taxed as part of the settlement will be treated as a LONG TERM GAIN. LOOK FOR THE LTCG ANSWER
Life insurance death benefits
Generally tax free to the beneficiary except for the transfer for value rule
Policy transfers that ARE NOT jeopardized by the transfer for value rule are as follows:
Transfer to the insured
Transfer to a partner of the insured (partnerships)
Transfer to a corporation in which the insured is a shareholder or an officer
Transfer pursuant to a divorce agreement
MEC
Contract that was entered into after 1988. Taxed like an annuity
Grandfathered non-MECs can be change grandfather rules if death benefit increases by MORE than 150k
Also if death benefit increases by any dollar amount, or an additional qualified benefit is purchased and the contract owner
did NOT have the right (has to show proof of insurability)to obtain such an increase or addition without providing additional evidence of insurability, it may lose its grandfathered status
If client did not have to show proof of insurability, can’t becom a MEC
The main difference between MEC and non MEC contracts is that loans and withdrawals have no tax effect on the non MEC contracts
Disability buy sell
Mostly the same as life buy sell, however in life buy sell, his family will get 500k income tax free buy the 500k will be included in his gross estate.
In Disability buy sell, deceased family gets 500k. He will pay 499k in cap gains (basis 1k).
General rule, pays by corporation will be treated as dividend. However important excpetion to dividen treatment is a compelte redemption
Annuities
Basis/yearly payout x life expectancy to get tax free return
If an annuity is owned by trust or corporation, the accrued gain for the year is taxed as income in that year. Basis increases that year
If the contract decreases in value that year, the basis of the contract is now adjusted downward. These situations would only occur when the annuity is owned by a corporation, not an individual
Group Life Insurance
For discriminatory plans, calculation to determine individual must report for the group life insurance for full year of coverage
Need to mutiply cents per 1000 by 12
Medicare coverage - skilled nursing facility coverage
Benefits 1st 20 days covered by medicare
21-100 day a co-payment is required of the patient by medicare (Insured (patient)pays 185.5/day and medicare will pay excess)
After day 100, patient pays in full
