Insurance Flashcards
HSAs entail which of the following risk management techniques?
- Risk avoidance
- risk retention
- risk reduction
- risk diversification
- risk transfer
2 & 4. HSAs require high deductibles. The high deductible is the risk retention; the insurance is the risk transfer. Ins 1-5
An employer cannot purchase or own a policy in which of the following circumstances?
- key person of the company
- stock purchase agreement
- deferred compensation
- cross-purchase agreement
- 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
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%?
$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
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.
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
Regarding different forms of HO policies, which of the following is true?
- 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.
- Form HO-3 provides open peril coverage on the insured’s personal property
- Form HO-4 us a renters policy
- The form HO-6 loss of use limit is 50% of the policy limit on personal property
- Form HO-5 provides open perils coverage for personal property
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
Which of the following are exclusions that generally apply to all of the Homeowner forms?
- Earth movement
- Intentional loss
- Neglect
- Riot and civil commotion
- Explosion
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
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?
$93,500. Replacement cost formula. Note: If depreciation info is not given Ins 3-7
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?
$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
Split Limits for Part A of Auto Policies
Maximum payable to any one person for BI / Aggregate that will be paid for all BI Claims / Aggregate Property Damage
Ins 3-12
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).
- $300,000
- $700,000
- $1,000,000
$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).
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?
$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
Which of the following benefits would be paid to an employee tax-free?
- Worker’s comp disability benefits
- Sick pay
- Unemployment benefits
- Vacation pay
Worker’s comp are always income tax-free. Although the employer may deduct the premium cost, that remains true. Ins 3-21
A disability qualifying event is ___ months for COBRA coverage.
29 months.
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?
- His group disability plan (30% of his salary)
- His PPO plan
- His group life insurance (2x salary)
- His 401(k)
- 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
Dr. Ted bought a guaranteed renewable policy at 35. Now 20 years later, the carrier doubled his premium. What are his options?
- To pay the original premium
- To lapse the policy
- To buy a new policy at a cheaper premium
- 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