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CFP Exam > Insurance > Flashcards

Insurance Flashcards

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1
Q

What is Risk?

A

A condition where there is a possibility of loss (a situation where exposure to loss exists).

  • Starting a business
  • Buying real estate
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2
Q

What is Peril?

A

The cause of a loss, the event insured against:

  • Fire
  • Windstorm
  • Theft
  • etc.
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3
Q

What is a Hazard?

A

A condition that may create or increase the chance of loss arising from a peril.

  • Owning a home on an earthquake fault
  • Owning a home by a river
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4
Q

What are the Elements of Insurance?

A
  • Large number of homogeneous exposure units
  • Loss must be definite and measurable
  • Must be fortuitous or accidental
  • Must not be catastrophic (for the insurance company)
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5
Q

What are the Methods to Avoid/Reduce Loss?

A
  • Avoidance:
    • Used in instances in which exposure has catastrophic potential, and the risk cannot be reduced or transferred.
    • Ex: Do not drive, Do not purchase a home but rent
  • Diversification:
    • Duplication of assets or activities at different locations
    • Ex: storing inventory at different locations, duplicate records
  • Transference:
    • shifting financial consequences associated with the risk to someone else
    • Ex: insurance
  • Retention:
    • intentional or unintentional retention of risk of loss from exposure.
    • Ex: deductible, coinsurance
  • Risk Reduction:
    • All techniques designed to reduce the likelihood of loss.
    • Ex: Sprinkler system, safety programs
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6
Q

What is Insurable Interest?

A
  • Property and Casualty: At inception and at time of claim
  • Life: At inception, but need not be at time of claim
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7
Q

What are the Parts of the Insurance Contract?

A
  • Declarations Page: Factual Statements that identify the specific person, property or activity being insured.
  • Definitions: Explanation of key policy terms
  • Insuring Agreements: Spells out the basic promise of the insurance company
  • Conditions: Spells out in detail the duties and rights of both parties.
  • Exclusions: Circumstances when the insurer will NOT pay.
  • DICE
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8
Q

What are Negligences?

A
  • Attractive Nuisances: Swimming pool, vacant lot
  • Negligence per se: Violation of a statute
  • Strict Liability
  • Product Liability
  • Absolute Liability: Workers Comp
  • Vicarious Liability: Respondeat superior (principal’s liability for their agents).
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9
Q

What are Defenses?

A
  • Assumption of Risk (skiiing, car racing)
  • Contributory (jay walking, being drunk)
  • Comparative (A is 20% negligent, B is 80%)
  • Last Clear Chance (Rear end someone when you could have avoided it by swerving, braking in time)
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10
Q

What are two methods of Calculating Life Insurance needs?

A
  • Capital Utilization Approach: Uses annuitization to provide needed income but leaves no money at the end of the planned period.
  • Capital Needs Approach: Uses interest only, so the original capital is still left at the end of the period (also called Capital Retention or Interest Only).
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11
Q

What are the most comprehensive Insurance Rating Service/Category services?

A
  • A.M. Best: A++ to F
  • Standard & Poor: AAA to CCC
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12
Q

What are Sections of a Homeowner’s Policy and

what do they cover?

A

Section I (Coverage: A B C D)

  • A - Dwelling and Attached Structures
  • B - Other structures, separate from dwelling (detached garage, fences, sheds)
  • C - Contents and Personal Property
  • D - Loss of Use Section II (Coverage: E F)
  • E - Liaiblity
  • F - Medical Payments
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13
Q

What property is excluded under Personal Property Coverage?

A
  • Animals, Birds, or Fish
  • Motorized Land Vehicles and Aircraft
  • Property of roomers, boarders or other tenants
  • Property contained in an apartment regularly rented or held of rental to others by the insured (unless specifically endorsed)
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14
Q

What are the Basic Form Perils Covered?

A

The policy lists perils covered:

  • Windstorm
  • Hail
  • Aircraft
  • Riot
  • Vandalism
  • Vehicles
  • Explosion
  • Smoke
  • Fire
  • Lightning
  • Theft

Study Hint: Remember: WHARVVES/FLT

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15
Q

What are the Broad Form Perils Covered?

A
  • Rupture of a System
  • Artificially Generated Electricity
  • Falling Objects
  • Freezing of Plumbing

Study Hint: Remember Basic plus RAFF

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16
Q

Homeowner’s Policy Exclusions include:

A
  • Earthquake
  • Flood
  • Neglect
  • Intentional Loss
  • Ordinance/Law
  • Power Failure
  • War
  • Nuclear Hazard

Note: Sinkhole is a covered peril for the exam

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17
Q

What is the formula for Replacement Cost Coverage?

A
  • Replacement Cost x Coinsurance Percentage = Insurance Required
  • Insurance Carried ÷ Insurance Required x Loss - Deductible = Amount Paid by Insurance
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18
Q

What are the requirements for a vehicle to be eligible for:

  • Insurance Services Office (ISO)
  • Personal Auto Policy (PAP)
A
  • Be owned by an individual or by a husband and wife living in the same household
  • Be private passenger auto
  • Not be used as public or livery conveyance
  • Not be rented to others
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19
Q

What are the Parts of an Auto Insurance Policy?

What do they cover?

A
  • Part A - Liability to third parties
  • Part B - Medical payments
  • Part C - Uninsured/Underinsured motorists
  • Part D - Damage to the covered auto
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20
Q

What is classified as a “Covered Auto” under an

Auto Insurance policy?

A
  • Any vehicle shown on the declarations page
  • Any of the following which you acquire during the policy period:
    • Private Passenger Auto
    • Pickup Truck
    • Panel Truck or Van

NO coverage for any of these used in a business (need a commercial policy for that)

  • Any trailer you own listed on the declarations page
  • Any auto or trailer you do not own while used as a temporary substitute for any vehicle decribed herein which is out of normal use because of a breakdown, repair, servicing, loss or destruction
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21
Q

Who are the Persons Insured under medical payments coverage of the PAP?

A
  • The named insured and any family member who suffers bodily injury caused by accident while occupying covered vehicle
  • The named insured and family members who if, while a pedestrian, are struck by any motor vehicle designed for use on public roads or by a trailer
  • Other persons while an occupant of the insured’s auto (passengers)
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22
Q

What is Uninsured Motorist Coverage (UM)?

A

This agreement promises to pay the amount an injured insured could have collected from the uninsured dirver if such driver had carried auto liability insurance. The term “covered person” as used under the uninsured motorist coverage of the PAP includes the following:

  • The named insured and any family member
  • Any other person occupying the insured’s covered auto
  • Any person, for damages that person is entitled to recover because of injury to a person described above

Note: UM is liability protection, NOT medical payments

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23
Q

What are the perils covered under the “Other Than Collision” Provision of an Auto Policy?

A
  • Glass Breakage

Loss caused by:

  • Falling Objects
  • Fire
  • Theft
  • Explosion
  • Earthquake
  • Windstorm
  • Hail
  • Water
  • Flood
  • Riot or Civil Commotion
  • Contact with Birds or Animals
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24
Q

What are the benefits of an Umbrella Liability Insurance?

A
  • Nearly always a correct answer since it is smart coverage
  • Provides liability coverage (BI/PD) for catasptrophic claims
  • Requires policy owner to carry certain underlying coverage of specified amounts
  • Professional acts are specficially EXCLUDED!
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25
Q

What are the two types Professional Liaiblity Insurance and who/what does it cover?

A
  • Malpractice - Bodily Injury (doctors, dentists)
  • Errors and Omissions (E&O) - Monetary damages (financial advisors, lawyers, accountants, insurance agents)
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26
Q

What does Worker’s Compensation cover?

A
  • Unlimited Medical Expenses
  • Diasbility Income (TAX FREE)
  • Death Benefits
  • Rehabilitation (Medical and Vocational)
  • Absolute Liability
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27
Q

Medicare does NOT cover…

A
  • Routine foot care, glasses, hearing aids, and dental
  • Emergency Care outside the US (some exceptions for Canada, Mexico and Caribbean)
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28
Q

Explain the limitations of Medicare’s Long Term Care coverage.

A

Benefits are Limited: Pays all of the first 20 days of SKILLED care and everything over a specified amount per day for the next 80 days of SKILLED care (100 day max)

The Limited Benefit is Subject to Substantial Restrictions: Pays for SKILLED care only:

  • Admission to a nursing home must follow within 20 days of the hospital stay of three days or more
  • The patient’s condition must be expected to improve
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29
Q

Compare HMO vs PPO

A

HMO (health maintenance organization):

  • Provider paid monthly fee regardless of services rendered (Capitation)
  • Out of Network care not covered at all
  • Primary is gatekeeper
  • Health care providers are employees

PPO (preferred provider organization):

  • Provider paid for actual services rendered
  • Out of network partially covered, usually 70%
  • Health care providers contract with PPO
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30
Q

What are the COBRA coverage requirements and Qualifying Events?

A
  • Must have 20 Full/Part-Time Employees.
  • The option to buy Continuation.
  • Family member must notify employer w/in 60 days
  • Cost cannot exceed 102%
  • Premiums due monthly

Coverage must be offered to: (Qualifying Event?)

  • 18 mos
    • Terminated employees/dependents up to 18 mo.
    • Voluntary or involuntary termination, change from FT to PT
  • 29 mos
    • disability by SS definition
  • 36 mos
    • Employee’s death
    • divorce, legal separation
    • eligibility for Medicare
    • Loss of dependent status (marriage)
    • Reaching dependency age limit specified by plan
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31
Q

What is a Health Savings Account (HSA) and

what are its benefits?

A
  • Used in conjunction with High Deductible Health Plan (HDHP)
  • Distributions are tax free if used for health care
  • Contributions not spent are carried forward and portable
  • Unused assets become property of named bene on death
  • Distributions for non-medical are ordinary income plus 20% penalty if under 65
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32
Q

What are the Definitions of Disability?

A

Own Occupation - Best definition for the insured

  • Modified any occupation

Split Definition - Own then modified

Any Occupation (Social Security definition)

  • Loss of Income
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33
Q

What are the Policy Continuation Provisions for Disability Income?

A
  • Noncancellable “Noncan”: Continuous term policy guaranteeing the insured’s right to maintain the policy at the stated premium
  • Guaranteed Renewable: Continuous right to maintain the policy, but the insurer may increase the premium by class of insureds
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34
Q

Taxation of Premiums and Benefits for Disability Policies

A

Taxation of Premiums and Benefits:

The individual owns the contract and pays the premium:

  • Premiums are not deductible
  • Benefits are tax free to the employee

The employee owns the contract and the employer pays the entire premium under a bonus arrangement like section 162 disability insurance:

  • Premiums are deductible by the employer as a bonus
  • Benefits are tax free to the employee.

The employee owns the contract and the employer pays the entire premium under a salary continuation plan (group plan).

  • Premiums are deductible by the employer
  • Benefits are taxable to the employee
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35
Q

Permanent Life Insurance (Low Risk Tolerance)

A
  • Insurance company controls the investment return
  • Assets part of the general account
  • Whole Life
  • Universal Life
36
Q

Permanent Life Insurance (High Risk Tolerance)

A
  • Client controls the investment return
  • Assets part of a separate account
  • Variable Life
  • Variable Universal Life
37
Q

What are the Dividend Options on Life Insurance?

A
  • Cash
  • Reduce Premium
  • Accumulate with Interest
  • Paid up Additions
  • One-year Term/5th Dividend

Remember: CRAPO

38
Q

What are the Nonforfeiture Options of Life Insurance?

A
  • Cash
  • Extended Term
  • Paid Up Reduced Amount
39
Q

What are the Life Insurance Settlement Options?

A
  • Cash
  • Pure Life/Single Life
  • Refund
  • Period Certain
  • Specified Income/Period
  • Interest Only
  • Joint and Survivor
40
Q

What is a Modified Endowment Contract (MEC)?

A
  • Entered into after June 21, 1988
  • Fails to meet the “7-Pay Test” (for the exam, includes ALL single premium policies)
  • Distributions/Withdrawals are taxed LIFO (Interest First)
  • Distributions under 59½ are also subject to 10% federal penalty tax (if not disabled)
  • Death Benefit is still tax-free
41
Q

What are the MEC Grandfather Life Insurance rules?

A
  • If death benefit increases by $150k or less and the insured has guaranteed insurability (no proof of insurability), the policy will NOT lose its grandfathered (non-MEC) status.
  • If the policy increases by ANY amount and the insured must prove insurability, the policy MAY lose its grandfathered (non MEC) status.
42
Q

When are the proceeds in a Life Insurance policy taxable due to Transfer for Value?

A

If an interest in a life insurance policy is transferred for valuable consideration (not a gift), the proceeds in the excess of the consideration paid for the policy, combined with any premiums paid by the owner, are taxable as ordinary income (like a viatical).

The main exceptions to this rule are:

  • A sale or transfer to the insured (most common)
  • A sale or transfer to a partner or partnership in which the insured is a partner
  • A corporation in which the insured is a shareholder or officer
  • Divorce
43
Q

What are the 1035 Tax Free Exchange Rules?

A
  • Life → Life (OK)
  • Life → Annuity (OK)
  • Annuity → Annuity (OK)
  • Annuity → Life (NO WAY!)
44
Q

Buy Sell Stock Redemption

vs

Cross Purchase

A

Stock Redemption:

  • No Step up in Basis

Cross-Purchase:

  • Step up in Basis
45
Q

Split Dollar Insurance

Endorsement Method

vs

Collateral Assignment Method

A

Split Dollar = Split-dollar life insurance isn’t an insurance product or a reason to buy life insurance. Split-dollar is a strategy that allows the sharing of the cost and benefit of a permanent life insurance policy. Any permanent life insurance policy that builds cash value can be used.

Endorsement Method:

  • Employer is the owner
  • Employee is not a shareowner

Collateral Assignment Method:

  • Employee is owner
  • Employee is a Shareholder
  • Employee assigns the policy
46
Q

Explain Annuity Taxation

A

Periodic Payouts:

  • Basis / Payout = Tax-free

Lump Sum Payouts:

  • LIFO (Interest First Rule)
  • Ordinary income plus 10% penalty if under 59½
47
Q

What are the characteristics of a

Flexible Spending Account (FSA)?

A
  • Medical
    • Must be used by March 15th or forfeited to the company
    • $2,750
  • Dependent Care
    • must be used by 12/31
    • $5,000
  • Not subject to income tax, FICA or FUTA
  • Health FSA may not be used to reimburse employee premiums paid for other health plans (such as MSA, HSA and LTC)
  • Expenses for LTC services can NOT be reimbursed under a health FSA, but other medical expenses can be reimbursed.
  • Employer does not contribute, only administer
48
Q

What are the major Tax Free Fringe Benefits?

A
  • Health Care Premiums
  • Insurance Premiums on non-discriminatory group life policy up to $50k
  • Company car for working conditions only
  • Employer-provided transit passes ($270/mo. cap) or parking ($270/mo. cap)
  • Occasional overtime meal money, cab fare, theater or sporting event tickets
  • Discounts on services limited to 20% of selling price charged to customers
49
Q

When are Fringe Benefits taxable?

A
  • Health Insurance Premiums paid for self-employed, partners, and more than 2% owners of an S-Corp are Taxable Income.
  • 100% is deductible as an adjustment to income on the FRONT of the 1040.
  • This can include all types of health insurance programs.
50
Q

Casualty Loss

A

A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty doesn’t include normal wear and tear or progressive deterioration.

51
Q

Which group insurance options offer conversion features?

A
  • Life
  • Health

(NOT disability)

52
Q

What benefits can be offered under a cafeteria plan

A
  • Cash benefit
  • group term life insurance
  • accident and health benefits
53
Q

Participating vs non-participating policies

A

A participating policy enables you, as a policyholder, to share the profits of the insurance company. These profits are shared in the form of bonuses or dividends. In non-participating policies, the profits are not shared and no dividends are paid to the policyholders.

54
Q

What annuity distribution method offers the highest periodic payment?

A

A single life annuity distribution

55
Q

Absolute Assignment

A

An absolute assignment is the act of complete transfer of the ownership (all rights, benefits and liabilities) of the policy completely to other party without any terms and condition.

56
Q

Superannuation

A

The outliving of income and accumulated assets in retirement

57
Q

What is liability risk?

A

The risk that we might hurt a third party and be sued. Can be intentional or unintentional. Tort liability or a civil suit.

58
Q

Tort

A

a wrongful act or an infringement of a right (other than under contract) leading to civil legal liability. They occur independently of contractual obligations and can result from:

  • negligence
  • intentional torts
  • strict liability
59
Q

What is a loss?

A

a partial or complete disappearance or reduction in value. It is the undesired end result of risk.

60
Q

What is peril?

A

Anything that causes financial loss.

Ex: unemployment, illness, old age, death, theft, fire, flood, etc

61
Q

Hazard and types of hazard

A

A condition that serves to increase the frequency or severity of perils

  • physical hazard
    • physical characteristics of the person/property that increase the chance of loss
    • ex: someone in poor health, house in flood zone
  • moral hazard
    • dishonest tendencies, often due to an insured’s weakened financial situation, that are likely to increase loss frequency and/or severity
    • ex: exaggerate a loss, fraudulent loss
  • morale hazard
    • an indifference to the loss when insurance is in place, which creates carelessness and increases the chance of loss
      • ex: doesn’t lock the car, careless smoking habits
62
Q

Adverse Selection

A

The liklihood that parties with the greatest probability of loss are the ones who most desire the insurance. Insurance seeks to avoid adverse selection

ex: Earthquake coverage in New England vs California

63
Q

Unilateral Contract

A

Insurance is a unilateral contract. Only the insurer promises to do anything, as there is no promise for the insured to pay the premium. There is no negotiation.

64
Q

Contract of Adhesion

A

An insurance contract is a contract of adhesion, meaning the insurance company prepares the entire contract.

  • the insured can accept or reject the contract. They cannot modify, alter, or negotiate
  • There are no modifications that can be made by the consumer, they can take it or leave it.
65
Q

Contract of utmost good faith

A

consists of the following 3 doctrines that relate to insurance:

  • misrepresentation: if the insured made a false statement, the insurance contract may be voided
  • warranties: a breach of warranty may cause an insurance contract to be voidable. A statement of warranty is included in the policy
  • concealment: failure of the insured to disclose material facts concerning the subject matter of the insurance may void the contract.
66
Q

Aleatory Contract

A

an agreement under which action is predicated on a specific event. The events are not controlled by either party.

67
Q

Dynamic risks

A

the result of the economy changing. insurance doesn’t cover these risks.

68
Q

Fundamental Risk

A

Impersonal, and usually a group risk. The loss affects large segments of the society at the same time.

Ex: earthquake or hurricane

69
Q

Particular Risk

A

A personal and individual risk. It affects only individuals or small groups of individuals at the same time, rather than a large segment of society.

ex: home burglary

70
Q

Personal Risk

A

Loss of income or asset resulting from the loss of ability to earn income through disability, death, or sickness.

71
Q

Speculative Risk

A

Involves both the chance of loss or gain. Speculative risk is not insurable.

ex: gambling

72
Q

Pure Risk

A

Involves the chance of loss or no loss

73
Q

Static risks

A

Losses caused by factors not related to the economy. These tend to occur with regularity and can be insured against.

ex: death of the family breadwinner

74
Q

Collateral source rule

A

holds that damages assessed against a negligent party should not be reduced simply because the injured party has other sources of recovery available (such as insurance or employee benefits).

75
Q

Negligence

A

The failure to act in a way that a reasonably prudent person would have acted under the circumstances

ex: not documenting patient files after providing medical procedure

76
Q

Negligence per se

A

The act itself constitutes negligence, thereby relieving the burden to prove negligence

ex: a driver causes an accident by driving the wrong way on the highway

77
Q

Absolute Liability

A

Liability without regard to negligence or fault

ex: you own a dog that bites the mailman

78
Q

Joint and Several Liability

A

Negligence cause by 1+ parties. Each party may be held fully liable. THe party paying more than its own legal share can seek contribution from the others who have not paid their proportional share.

ex: an electrician wires a home that the inspector approves, which causes a fire. Both can be sued and held jointly and severally liable.

79
Q

Vicarious liability

A

One person may become legally liable for the torts (negligent behavior) of another.

ex: if a child drives a car registered to a parent, for a family purpose, then the parent is responsible for the negligent acts of the child at the wheel. A business for their employee.

80
Q

Strict liability

A

liability for damage resulting from some extraordinarily dangerous activity or other statutorily defined activities. Negligence does not have to be proved; however, defenses may be allowed to refute or lessen liability (unlike absolute)

81
Q

Voidable vs void

A
  • Voidable: allows one party the option of breaking the agreement because of an act or omission of an act (a breach) by the other party (SOMEONE WHO CONTACTS WITH A MINOR. Minor can void, not other party)
  • Void contract: a contract that a court will not enforce because from it’s beginning, it lacked 1+ features of a valid contact (offer and acceptance, consideration, legal capacity, legal purpose)
82
Q

Insurable Interest

A

The right or relationship with regard to the subject matter of the insurance contract such that a policy owner would suffer financial loss from damage, loss, or destruction

It is used to prevent gambling, to decrease moral hazard, and to help measure the actual loss.

ex: for property insurance, insurable interest must exist at the time of loss.

for life insurance contract, insurable interest mush only exist at the time the insurance is purchased.

83
Q

Actual Cash Value

A

The amount that can be recovered from a loss, regardless of the amount of insurance purchased. Takes depreciation into account, the value of insured item decreases, and that is covered, not what it was originally.

Limits over-insurance and willful destruction of property.

Life insurance policies are the exception to the indemnity principle, with the recover amount being the face of the policy, not the actual value of the life insured.

84
Q

What are the levels of care?

A
  • skilled
    • medically required care
    • 24 hr oversight
    • provided by licensed medical practitioner
  • intermediate
    • medical care
    • intermittent
    • provided by nurses/nurse’s aides under supervision of a licensed physician
  • custodial
    • non-medical services
    • periodic care with activities of daily living (ADLs)
    • as-needed
    • provided by non-licensed caregivers
85
Q

What are ADLs and why are they important?

A

Activities of daily living

bedcot

  • bathing
  • eating
  • dressing
  • continence
  • on/off toilet
  • transferring

Importance

  • LCT insurance benefits are triggered when unable to perform 2 of the 6 ADLs for 90+ days
  • medical assessment needed
  • COgnitive impairment alone triggers LTC benefits
86
Q

PLTCi

A

Partnership LTC

  • benefits provided dollar for dollar in the event benefits are exhausted and the insured must apply for Medicaid and enter the Medicaid “spend-down” period
  • “spend-down”: the insured may generally keep only $2k and will not be eligible for Medicaid unless assets get to that level
  • This insurance allows the insured to keep $2k plus the benefits paid by the policy and still qualify for Medicaid
  • a policy with max benefits of $200k allows the insured to shelter $202k and receive Medicaid benefits after the policy benefits have been exhausted
  • joint federal-state policy initiative to promote private LTC insurance
  • Tax benefits
    • premiums, up to the annual limit, can be itemized for tax deduction purposes
    • benefits are received tax free
    • policy must include inflation protection
    • benefits are available for care in the home or a facility

CFP Exam (7 decks)

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