Insurance Flashcards

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1
Q

HSAs entail which of the following risk management techniques?

  1. Risk avoidance
  2. risk retention
  3. risk reduction
  4. risk diversification
  5. risk transfer
A

2 & 4. HSAs require high deductibles. The high deductible is the risk retention; the insurance is the risk transfer. Ins 1-5

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2
Q

An employer cannot purchase or own a policy in which of the following circumstances?

  1. key person of the company
  2. stock purchase agreement
  3. deferred compensation
  4. cross-purchase agreement
A
  1. In a cross purchase agreement, no insurable interest exists for the company (stockholder buys other stockholder’s interest). The first three answers indicate insurable interest. Ins 1-9
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3
Q

Tom, the sole provider for his family, is married and has a 6-year old son. He earns $120k/year. When he dies, he knows his wife will receive $20k from Social Security. What amount of money will provide an equivalent income, without invading principal, if the money is invested at 7%?

A
$1,528,571. 
(120-20)/.07 = $1,428,571.
Plus the money for year 1 (Tom's wife cannot wait until the end of the year for income): + $100k
Total needed: $1,528,571
Ins 2-4
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4
Q

If John dies, he wants his wife to have yearly income of $36,000 that will increase with inflation (4%). He can realize a net investment return of 7%. Use a capital retention calculation to determine how much insurance he should purchase.

A

He needs $1,236,000.

$36,000/.03* = $1,200,000
+ money for Year 1 = $36,000
= Total = $1,236,000

  • To find the divisor, use 7-4=3. When the question provides no number of years, presume it is a capital retention question. Do not use real rate of return calc in this type of insurance question. Ins 2-4
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5
Q

Regarding different forms of HO policies, which of the following is true?

  1. Form HO-2 differs from HO-3 in that the HO-2 policy provides broad form coverage on the dwelling, other structures, and loss of use while the HO-3 offers open perils coverage.
  2. Form HO-3 provides open peril coverage on the insured’s personal property
  3. Form HO-4 us a renters policy
  4. The form HO-6 loss of use limit is 50% of the policy limit on personal property
  5. Form HO-5 provides open perils coverage for personal property
A

1, 3, 4, & 5 are true. Form HO-3 only provides broad form coverage on personal property. An additional endorsement’s HO-15 can be added to the HO-3 to provide open perils coverage on contents.
ins 3-5

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6
Q

Which of the following are exclusions that generally apply to all of the Homeowner forms?

  1. Earth movement
  2. Intentional loss
  3. Neglect
  4. Riot and civil commotion
  5. Explosion
A

1, 2, & 3 are excluded. 4 & 5 are covered perils. Remember OPEN WIF (Ordinance of law, power failure, earthquake, neglect, nuclear hazard, war, intentional loss, flood) Ins 3-5

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7
Q

Lupita owns a home with a current replacement cost of $400,000 (ignoring the land). The home is covered under an HO-3 policy for $300,000 with coinsurance of 80% and a $250 straight deductible. A fire caused $100,000 of covered damages. How much will the insurance company apportion for this loss?

A

$93,500. Replacement cost formula. Note: If depreciation info is not given Ins 3-7

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8
Q

Marilyn’s home suffers extensive roof & ceiling damage from a severe thunderstorm and tornado. The loss if $36,000. The replacement cost of the home is $340,000 although the FMV of the land and dwelling is $480,000. The insurance company estimates the roof is 50% depreciated. Marilyn only has $260,000 of coverage A (dwelling). Coverage A has a $1000 deductible. How much of the claim will be paid by the insurance company?

A

$33,412.
When the amount of required insurance on the dwelling is less than 80% ($260/340 = 76%), the insurance pays the greater of ACV or replacement cost (less the deductible).
The amt the insurance co would pay under ACV is as follows:
$36,000 (replacement cost) * 50% (amount of depreciation) = $18,000 - $1,000 (deductible) = $17,000.

The amt the insurance co would pay under replacement value is as follows:
$340,000 replacement cost * 80% = $272,000 (insurance required).
($260/$272)*$36,000 - $1,000 = $33,412

Ins 3-8

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9
Q

Split Limits for Part A of Auto Policies

A

Maximum payable to any one person for BI / Aggregate that will be paid for all BI Claims / Aggregate Property Damage

Ins 3-12

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10
Q

Rocky has a serious at-fault auto accident. He is being sued for $1M for Bodily Injury by the other person. He has the following coverage:
Auto: $300,000/$500,000/$100,000
Umbrella: $1,000,000 (It requires $300,000 of coverage).

  1. $300,000
  2. $700,000
  3. $1,000,000
A

$1,000,000. Rocky carried $300k per person of underlying coverage. In this situation, he will be covered to $1M ($300k auto and $700k umbrella).

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11
Q

Nick purchased a $1M umbrella policy requiring him to carry $300,000 liability limits on his HO-3. However, his homeowners policy only has $100,000 of liability coverage. Due to a swimming pool accident, he is sued for $1M. What amount of benefit will the umbrella policy pay?

A

$700,000.
Because Nick did not carry 300k of underlying liability, he will only have $800k of total coverage ($100k homeowners plus $700k umbrella). He will be responsible for the remaining $200k (the gap between the requirement ($300) and actual ($100).
Ins 3-17

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12
Q

Which of the following benefits would be paid to an employee tax-free?

  1. Worker’s comp disability benefits
  2. Sick pay
  3. Unemployment benefits
  4. Vacation pay
A

Worker’s comp are always income tax-free. Although the employer may deduct the premium cost, that remains true. Ins 3-21

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13
Q

A disability qualifying event is ___ months for COBRA coverage.

A

29 months.

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14
Q

Mr.Fitt, 55, is single & in good health. He has never been married. He is an executive with a mid-size company. The company provides a 401(k). He has been deferring the max and the company matches 6% plus an occasional profit-sharing contrib. In addition to this plan, he has saved & invested. He plans to retire around 62 but before FRA. Which of his employee benefits would you counsel him to continue?

  1. His group disability plan (30% of his salary)
  2. His PPO plan
  3. His group life insurance (2x salary)
  4. His 401(k)
A
  1. His PPO plan.
    Disability doesn’t matter bc he’ll be retired.
    Life insurance could be converted, but why? He has no partner/children.
    His problem is he will have more than 18 months from retirement to Medicare eligibility. He may be able to convert or maybe he should work until 63 1/2. The 401(k) is not an issue.
    Ins 4-14
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15
Q

Dr. Ted bought a guaranteed renewable policy at 35. Now 20 years later, the carrier doubled his premium. What are his options?

  1. To pay the original premium
  2. To lapse the policy
  3. To buy a new policy at a cheaper premium
A
  1. Under guaranteed renewability, Dr. Ted’s only choice (other than to cancel the policy) is to pay the higher new premium. A new policy would also entail higher premiums (he is much older now).

Noncan policy = premium will NOT increase

Guaranteed Renewable = premium MAY increase
Ins 5-2

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16
Q

Ruby owns an S-Corp. The corp pays her individual disability insurance premium under a salary continuation agreement. Which is true?

  1. The benefits are tax-free to Ruby.
  2. The benefits are taxable to Ruby.
  3. The corp cannot deduct the premium
  4. The premiums paid by the corp are not a tax consequence to Ruby.
A
  1. is true. The corp can deduct the premium. The s-corp charged her with the premiums paid, therefore, the benefits are tax-free.

If the employee owns the contract and pays the premium, they are tax-free to the employee. Not deductible by ER.
If the employee owns the contract and the ER pays the premium under a Section 162 bonus, they are tax-free. This is b/c the premium cost is included in the EE’s W-2. Premiums are deductible for the ER as a bonus to the EE.
If the employee owns the contract and the ER pays the premium under a salary continuation plan (Group Plan), they are taxable to the EE and deductible by the ER.

Partnerships & S-Corps CAN deduct the premiums paid for coverage for a partner/greater than 2% shareholder as a business expense. Premiums are included in the taxable income of the partner/shareholder (conduit income). Proceeds are then EXCLUDABLE from taxable income (EE pays the premium).

17
Q

Qualified LTC policies have all the following characteristics except:

  1. Must be noncan
  2. Limited premium deduction based on age (generally, only if itemizing)
  3. Must provide skilled & Alzheimer’s care. There is no daily limit for skilled care only.
  4. Must have cash value
A. All of the above
B. I, IV
C. II
D. II, IV
E. I, III, IV
A

E. I, III & IV are incorrect. LTC policies must be guaranteed renewable, not noncan.
II is correct.
Benefits received tax-free are subject to a dollar cap regardless of the type of care.
Qualified LTC policies cannot be cash value policies.

Ins 5-10

18
Q

Which of the following are generally true about Medicare coverage regarding LTC?

  1. It will pay up to the first 80 days of skilled care.
  2. During first 20 days in the facility, a co-payment is required from the patient.
  3. A hospital stay of three days consecutively is necessary to qualify for coverage.
  4. The care must be skilled care.
  5. No more than 30 days can lapse between the hospital stay and admittance to a skilled nursing facility.
A

III, IV, & V are correct. Coverage lasts for up to 100 days, cost for first 20 days is paid in full under Medicare Part A.
Ins 5-11

19
Q

Tom, age 32, is married with 2 young kids. He wants the lowest premium/level death benefit for his insurance needs over the next 20 years. Which type would suit him best?

  1. First-to-die
  2. 10-year level term with re-entry provision
  3. Yearly renewable term
  4. decreasing term
A
  1. 10-year level term with re-entry. After each 10-year period, tom may requalify for another 10 years of level protection. However, new medical underwriting is required. Yearly renewable will be expensive over a 20-year period. 4 is wrong because tom wants a level death benefit. 20-year level term would be a good recommendation, but it is not a choice.
    Ins 6-5
20
Q

John operates his computer repair business as a sole prop. Through business dealings and poor personal planning, he owes considerable debt. Lately, however, his business is producing significant income. John, age 35, also informs you that he may get married to Wendy age 33, who has 3 kids. What type of insurance do you recommend currently?

  1. Joint life
  2. Decreasing term
  3. Straight whole life
  4. 10-year level term
A
  1. 10-year level term. Over time, he can lower the death benefits, cancel the policy, or convert it to a permanent policy. This provides flexibility with his changing needs and cash flow.
21
Q

Mrs. Pitch, age 65 & widowed, has substantial wealth. She has decided to establish a life insurance trust to provide for estate liquidity. Her health is excellent. In view of her parents’ longevity, she expects to live in her late nineties. She is concerned with paying premiums for the rest of her life and wants a guaranteed level premium policy. What type of insurance would you recommend?

  1. Limited-pay whole life
  2. Straight whole life
  3. 30-year level term
  4. 10-year level term with re-entry provision
A
  1. The keys are good health, longevity, guaranteed premiums, and substantial wealth to pay premiums faster, but for a limited time period.
22
Q

Bill bought a $100,000 universal life insurance policy with a level/type A/option I death benefit. If the accumulated cash savings account balance was $20,000 at the time of his death, how much would the death benefit be?
What if he had instead purchased an increasing/Type B/Option II policy?

A

$100,000 for Type A / $120,000 for Type B (death benefit plus cash value). Ins 6-8

23
Q

Tim, age 30, wants a LI policy. Tim’s dad and mom died at a fairly young age due to health issues. If he lives until retirement age, he would like the policy to provide income for some of his retirement needs. Tim works in a high paying, but shaky job. Which is best?

  1. Variable universal
  2. Whole life
  3. 20-year level term
  4. Annual renewable term
A
  1. Variable universal should meet his family needs and retirement needs with flexible premiums. If Tim pays a higher premium for the first few years, then if his employer fails, he can reduce or stop paying the premiums.
24
Q

Spencer Spender age 30, has a wife and 2 young kids. Spencer makes a lot of money, but spends most it. He doesn’t feel this will change. He feels he needs a life insurance policy that will force him to put away money. What do you suggest?

  1. 30-year level term
  2. Variable universal life
  3. Whole life
  4. Second-to-die whole life
  5. Universal life
A
  1. Whole life will force him to pay premiums and will provide coverage for life. Second-to-die is usually purchased for estate liquidity. With the variable and universal policies, he will not be forced to pay premiums. Ins 6-11