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Comprehensive > Insurance > Flashcards

Insurance Flashcards

1
Q

annual renewable term

A
  • term insurance
  • premium increases annually
  • no cash value
  • death benefit is fixed
  • can be converted to permanent policy w/o proving insurability
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2
Q

decreasing term

A
  • premiums are level
  • death benefit decreases over time
  • can usually convert to permanent without evidence of insurability
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3
Q

universal life

premium, DB, investment control, return, uses

A

flexibility (premiums, DB, CV)

  • premium: variable; subject to required minimum
  • DB: constant (A) or can increase with CV (B)
  • investment control: insurer
  • rate of return: minimum guarantee; can be higher based on interest rates
  • uses: flexibility without investment responsibility
  • cash value can be used to pay premiums
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4
Q

universal life A vs B

A

Universal A: DB is constant (unless CV increases beyond initial DB).

  • As CV increases, amount at risk to the insurance company decreases.
  • No premium required if enough CV, though the intent of the policy is to maintain the CV so it grows, particularly since mortality costs increase over time.

Universal B: DB increases over time because it = insurance specified + CV

  • More expensive than A.
  • Insured receives DB and CV
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5
Q

variable universal life

premium, DB, investment control, return, uses

A
  • premium: variable; subject to minimum
  • DB: guaranteed minimum; can increase in CV increases
  • investment control: insured
  • rate of return: based on investments chose by insured
  • uses: flexibility with investment control; fixed premiums
  • no minimum guaranteed rate of return
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6
Q

whole life (aka ordinary life)

premium, DB, investment control, return, uses

A
  • Premium: fixed
    • typically paid for lifetime (WHOLE LIFE)
    • can have different premium patterns like single premium, increasing premiums (modified whole life), or limited pay
  • DB: fixed
  • Investment control: insurer
  • Rate of return: fixed
  • Uses: wants guarantees; has lifetime needs (income, retirement, estate tax)
  • can take loans from CV
  • dividends represent return of premium (i.e., not taxed)
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7
Q

options for life insurance dividends

A

CRAPO

  • Cash (treated as return of premium)
  • Reduce future premiums
  • Accumulate at interest
  • Paid-up permanent additions
  • One-year term insurance additions (known as ‘5th dividend option’)
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8
Q

types of whole life

aka ordinary life

A
  • ordinary life: pay premiums until age 100 or 120
  • limited pay life: pay premiums until certain age (e.g., retirement)
  • variable life: CV is invested by insured (stock, bond, money markets)
    • DB still guaranteed
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9
Q

MEC

A
  • Life insurance policy that is considered an investment because too much was put in in the first 7 years
    • too much = funding it fully in <7 years
  • distributions taxed as ordinary income + 10% penalty if <59 ½
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10
Q

incontestibility

A

once the policy has been in force for a certain time (typically 2 years), insurance company will not contest the policy

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11
Q

Absolute assignment

A

policy provision

owner transfers all policy rights (usually due to divorce)

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12
Q

collateral assignment

A

policy provision

use insurance as collateral for debt

limited ownership rights; terminates when debt is satisfied

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13
Q

reinstatment

A

typically requires back payment of premiums and evidence of insureability after grace period

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14
Q

Transfer for Value Rule and exceptions

A

DB become taxable to transferee to extend DB > basis

Exceptions:

  • to insured
  • to business partner
  • to partnership
  • to corporation where insured is shareholder
  • that results in carryover basis from transferor to transferee (e.g., gifted)
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15
Q

What Viatical settlements are and how they’re taxed

A
  • Insured sells life insurance policy to viatical company
  • if terminally ill (expect to die within 24 months0, no income tax
  • Buyer has to pay taxes on proceeds - purchase price - other costs
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16
Q

speculative risk

A

chance of a loss or a gain

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17
Q

risk management tools

A
  • avoidance - drinking and driving
  • transfer - use insurance; high severity, low frequency
  • retention/reduction - minor financial loss; would be expensive to insure (minor injuries, car door dings, property damage on a cheap car)
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18
Q

law of large numbers

A

the more people who are insured the more likely it is that the actual losses will equal expected losses

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19
Q

peril vs hazard

A

peril is the cause of a loss (wind, fire, burglary)

hazard is condition that increases the likelihood that a loss will occure (moral, morale, physical)

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20
Q

requisites of insurable risk

A
  • large number of exposure units
  • losses have to be accidental
  • not catastrophic for insurance company
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21
Q

principle of indemnity

A

insurance makes you whole, but you cannot profit from it

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22
Q

subrogation clause

A

insured cannot receive compensation from both insurer and third party for the same claim

insurance company has the right to collect on your behalf

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23
Q

general vs independent agent

A
  • general - represents one insurer
  • independent - represents multiple, unrelated insurers
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24
Q

actual cash value

A

replacement cost less depreciation

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25
Q

does home and other property insurance typically cover replacement cost or actual cash value?

A

home - replacement

property (e.g. auto) - actual cash value

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26
Q

how much is covered if an individual has sufficient insurance vs when they dont carry insurance minimums

A

will pay the greater of actual cash value or formula:

(amount of coverage carried / coinsurance requirement) x loss - deductible

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27
Q

who regulates insurance?

A

state, not federal

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28
Q

legislative branch

A

enact laws that provide for licensing agents, doing business, in a particular state

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29
Q

judicial branch

A

rules on constitutionality of laws passed by legislative branch

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30
Q

executive branch or state insurance commissioner

A

administrators

interpret and enforce insurance laws

member of NAIC

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31
Q

federal oversight of insurance

A

IRS, SEC, and ERISA have oversight when applicable, but primarily regulated at state level

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32
Q

NAIC

A
  • provides watch list of insurance companies based on financial ratios
  • no regulatory power
  • issues model legislation
  • accredits state insurance regulatory offices
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33
Q

steps of risk management

A

DIEDIE

  1. determine objectives
  2. identify risks
  3. evaluate risks (probability, occurrence, loss)
  4. determine alternatives for managing risk
  5. implement
  6. evaluate, monitor, review
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34
Q

capital needs approach vs human value approach

A
  • capital needs approach - amount needed to fund income needs, education, retirement funding
  • human value approach - amount of income earned less amount consumed by insured
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35
Q

Cross Purchase vs Entity Purchase

A
  • Cross: Each owner buys insurance on each other; surviving owners get step up in basis
  • Entity: Company pays; No step up in basis for surviving owners
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36
Q

How are premiums and death benefit treated from a tax perspective for key person insurance

A

Premiums are not deductible as business expense

DB received tax-free

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37
Q

equity indexed annuities

A

linked to index but you don’t match that index because there’s also a participation rate (e.g., you get 70% of the market) and often have a cap on the return you can earn

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38
Q

pure life annuity vs life annuity with guaranteed minimum payments

A
  • pure: payments made over entire life but stop at death; could receive just one payment and die
  • guaranteed: payments continue for a minimum term paid to beneficiary after death
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39
Q

installment refund annuity

A

payments continue until death

if annuitant doesn’t get back what he paid in, he gets a refund for the difference

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40
Q

how are annuities taxed once annuitized?

A

Exclude from tax based on % of payment that is basis

basis / total payments = exclusion ratio

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41
Q

viatical settlements

A
  • must be terminally ill (expected to die in 24 months)
  • no tax to insured
  • purchaser pays tax on the amount the proceeds exceed basis (purchase price + additional premiums paid)
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42
Q

how are withdrawals from annuities taxed before annuitized?

A
  • pre-August 14, 1982 - FIFO
  • post-August 13, 1982 - LIFO
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43
Q

Major medical health insurance

A
  • hospitalization, physician and surgeon fees, PT, prescriptions (HPPPS)
  • unlimited lifetime and annual limits
  • eye and dental excluded
  • usually 80/20 coinsurance with MOOP
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44
Q

Does MOOP include the deductible?

A

Yes

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45
Q

Patient Protection Affordable Care Act

A
  • guaranteed issue (no pre-existing conditions excluded)
  • guaranteed renewal
  • premium rates can only be based on age, geographic area, family composition, and tobacco use
  • kids covered until 26
  • no lifetime/annual limits on coverage
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46
Q

PPO

A
  • network of health care providers
  • provider offers discount on services
  • better coverage within network
47
Q

HMO

what is it and what are the staff, group and IPA models

A
  • can only go to doctors within the HMO
  • monthly fee
  • models:
    • staff - HMO is a corp. where staff are employees of HMO
    • group - aka network model; contracts with groups of medical providers
    • individual practice association - physicians have their own office locations but contract to HMO on fee-for-service basis
48
Q

HSA exclusions from coverage

A

cosmetic surgery and over-the-counter drugs if no prescription

49
Q

HSA penalties for non-medical expenses

A
  • tax + 20% penalty if <65
  • tax if 65 or older (no penalty)
50
Q

moral vs morale hazard

A

moral: character flaw (filing false claim)
morale: indifference due to having insurance (e.g., leaving keys in the car)

51
Q

non-forfeiture rights vs settlement options vs dividend options

A
  • Non-forfeiture
    • ensure money paid on an insurance policy is not absorbed by the company without recourse in the event insured decides to terminate coverage
    • includes cash surrender value, reduced paid up, or extended term
  • Settlement
    • lump sum, interest only, annuity (fixed amount, life income, fixed period, life income with period certain, joint and last survivor income)
  • Dividend
    • cash, accumulate at interest, reduce premiums, paid-up additions, one-year term
52
Q

when can insured start using long-term care insurance

A

when unable to do 2 of 6 ADLs

severe cognitive impairments where care is required to protect their health and safety (alzheimers)

53
Q

ADLs

A

eating, bathing, toileting, transferring, dressing, continence

note: walking is not an ADL

54
Q

direct recognition program

A

if you take a loan from the CV, the amount of dividends and interest you receive on the policy is based on the new lower CV

55
Q

can the owner of a life insurance policy borrow from the CV if an irrevocable beneficiary is named?

A

Yes, but only with approval from the beneficiary

56
Q

non-cancelable policies

(what is it and do premiums change)

A

guaranteeing right to renew

premium is fixed

57
Q

guaranteed renewable

(what is it and do premiums change)

A

right to renew

premiums may be adjusted by insurer

58
Q

how to be eligible for COBRA

A
  • death of covered employee
  • termination (except if terminated for gross misconduct)
  • reduced from FT to PT
  • separation from spouse who was covered
  • became eligible for Medicare
  • dependent child no longer eligible (age, left school)
59
Q

which employers does COBRA apply to?

A
  • has a group health plan
  • 20+ FT employees
60
Q

how long must employers offer COBRA?

A
  • 18 months - normal termination
  • 36 months - death, divorce, medicare eligibility, loss of dependency status
  • 29 months if disabled (because 5 month elimination period + once you’ve been receiving SS benefits for 24 months, you’re eligible for Medicare)
61
Q

long term care types of coverage

A
  • skilled nursing
  • intermediate nursing
  • custodial care
  • home health care
  • assisted living
  • adult day care
  • hospice
62
Q

how are long term care premiums and benefits taxed

A
  • premiums: deductible to extent they are >7.5% AGI (b/c medial deduction)
  • benefits: tax free if policy is qualified
  • max deduction varies by age with > 70 being the highest at $5640
63
Q

what makes a long term care policy qualified

A
  • no surrender value
  • dividends used for reduced premiums or more benefits
  • doesn’t may for expenses covered under Medicare
  • meets consumer protection laws
64
Q

modified any occupation (disability)

A

considered disabled if unable to perform job that reasonably fits education, experience, training, and prior economic status

65
Q

duration of short-term disability

A

typically 2 years or less

66
Q

elimination period (disability)

A

amount of time until benefits begin

67
Q

HO Section I (Coverage A, B, C, D)

what are they and typical coverage

A
  • A - dwelling (usually must be >80% of replacement cost)
  • B - other structures (usually 10% of A)
  • C - personal property (usually 50% of A)
    • actual cash value unless endorsed
  • D - loss of use
68
Q

Basic named perils vs broad named perils for HO insurance

A
  • basic - there are 12
  • broad - there are 6
  • (don’t need to memorize them all)
69
Q

open peril policy

A

everything is covered unless exclusion

exclusions: usually neglect, flood, earthquake (sudden and accidental)

70
Q

General exclusions for all HO policies

A
  • movement of ground (earthquake, landslide)
  • ordinance of law
  • damage from water (floods, sewer backup)
  • war/nuclear
  • power failure
  • intentional act
  • neglect
71
Q

HO Section II (Coverage E, F)

A
  • E - personal liability (from bodily injury and property damage from others, legal costs)
  • F - medical payments to others (even when not liable; person must have permission to be there, injury you caused to others while you were away) (they have Fallen and cant get up)
72
Q

HO 1-6, 8, 15

A
  • 1 - basic perils
  • 2 - broad perils
  • 3 - special (open perils except personal property is covered on broad perils unless HO15 endorsement which basically makes it HO5) - includes boats up to 25HP
  • 4 - renters
  • 5 - open perils (the most comprehensive)
  • 6 - condo
  • 8 - modified form (covers repair rather than replacement cost; when replacement cost > value)
  • 15 - endorsement that gets personal property covered on open endorsement
73
Q

when is a flood policy typically in force?

A

typically 30 days before coverage begins unless area just became a qualified flood zone or it’s a mortgage requirement

74
Q

inland marine insurance

A

endorsement to cover specific personal property from imports, floaters, and domestic shipments (furs, jewelry, silverware, golf equipment, camera, fine art, antiques)

excludes: the hull of the ship

75
Q

Auto policies part A

what is it, what does it include, what are amounts

A
  • liability - you caused damage
  • includes you, family member, someone using your car
  • bodily damage per person / bodily damage per occurrence / property damage per occurrence
  • policy priority first follows the car (insures anyone driving it) and then the person (you while using friends car)
76
Q

auto policies part B

A
  • Medical paymens
  • includes you and family members in the car or as pedestrian, others in the car
  • exclusion: public livery (using car as Uber) and car being used without permission
77
Q

auto policies part C

A
  • uninsured motorists
  • uninsured or under-insured driver must’ve been at fault
  • exclusion - auto used in business
78
Q

auto policies part D

A
  • damage to your auto
  • collision - you hit something (accident with another car, running off road, hitting dead animal, tree, etc.)
  • comprehensive - anything other than collision (falling objects, fire, theft, contact with live animal)
  • exclusions - public livery (uber), electronic equipment, nuclear, car used without permission or in business
79
Q

auto policies part E and F

A
  • E - duties after accident - notify insurer, proof of lose, cooperate, police report if theft or uninsured motorist
  • F - general provisions - only covered in US, Puerto Rico and Canada (no Mexico)
80
Q

no fault auto insurance

A

required in specific states; each party files a claim and collects from their own policies for injuries/medical claims

81
Q

contributory negligence vs comparative negligence vs Last Clear Chance

A
  • varies by state
  • contributory - if injured party contributed in any way, they cannot collect (less common)
  • comparative - can still collect the portion of the loss that wasn’t the result of my negligence
  • Last Clear Chance - can still collect if contributory but must prove defendant had chance to avoid the accident (e.g., I was J-walking but the driver had the last chance to avoid hitting me)
82
Q

exam tip - who needs a PLUP?

A

everyone; $1M coverage

83
Q

CLUP

A

commercial liability umbrella policy

84
Q

what % is FICA tax?

A
  • Social Security: 6.2% for both employee and employer up to wage base (on tax table sheet)
  • Medicare: 1.45% for both employee and employer with no wage max
85
Q

how social security is impacted if it is taken early or late

A
  • Early
    • Lost 5/9% for each month for first 3 years
    • Lose 5/12% for each month beyond 3 years
  • Late
    • 2/3% for each month or 8% a year up to age 70
86
Q

definition of disability for social security

A

expected to last for 12 months or result in death and you cannot perform duties of any occupation

87
Q

who qualifies for Medicare?

A
  • >65
  • disabled (according to social security) for > 2 years
  • spouses can qualify at 65 based on their spouse’s work record
88
Q

who qualifies as fully insured for social security benefits

A

40 quarters making $1510/quarter in wages

89
Q

who qualifies as fully insured for disability

A
  • 31 or older: 40 quarters total and 20 of the last 40
  • 24-31.5: 1/2 of the quarters that have passed since you reached 21
  • 21-23: 6 quarters
90
Q

who can receive someone’s social security benefits?

A
  • Spouse of disabled/retired if 62 OR caring for child <16 or disabled (50% of benefits)
  • child if student under 18 (50% or 75% if retiree died)
  • divorced spouse if 62, was married >10 years and didn’t remarry before age 60
  • window if 60 (100%) OR caring for child <16 (75%)
  • dependent parent: if retiree died and was fully insured (75%)
91
Q

currently insured

A

6 of last 13 quarters

  • if disabled, do not get Medicare, monthly disability benefit, monthly spouse benefit, or lump sum
  • if die, get monthly survivor benefit if child <16, child <18 gets monthly benefit, and lump sum
92
Q

what happens to social security benefits if you draw on benefits early but keep working

A

benefits are reduced $1 for every $2 you earn above earnings limitation (on formula sheet) (wages only; not pension income)

93
Q

taxation of social security benefits

A
  • up to 85% based on AGI + nontaxable interest + ½ SS benefit
  • 1st hurdle: $25K single; $32K MFJ
  • 2nd hurdle: $34K single; $44K MFJ
94
Q

Medicare Part A

A
  • hospital insurance (covers places)
    • inpatient, skilled nurses, home, hospice
  • covers: semi-private rooms, meals, ORs, lab test, x-rays,
  • excludes: custodial (e.g., LTC)
95
Q

Medicare Part A deductible and coinsurance

A
  • deductible: $1556 per benefit period for first 60 days
  • coinsurance:
    • days 61-90: $389 per day ($1556/4)
    • days 91-150: $778 ($1556/2)
    • $194.50 skilled nursing care days 21-100 (1556/8)
      • first 20 days are 100% covered following hospital stay
96
Q

Medicare Part B

exclusions, premium, deductible

A
  • excludes: dental, cosmetic, hearing aids, eye, preventative
  • automatically enrolled unless you opt out
  • premiums deducted from SS at standard of $170.10 or higher based on income
  • deductible: $233/year then Part B pays 80%
97
Q

Medicare Part C

A
  • Medicare Advantage of Medicare Managed Care Plan
  • requirement: Must also have A and B
  • covers: all of original Medicare except hospital, emergency services, may offer dental/eye/wellness
98
Q

Medicare Part D

A
  • prescription drugs
  • also requires monthly premium, deductible and coinsurance
99
Q

Where does Medicare provide coverage?

A

in-US only unless closest hospital is in a foreign country

100
Q

how to apply for Medicare

A

Automatic at age 65 if you are already receiving SS; Must enroll if not

101
Q

aleatory

A

money exchanged my be unequal (e.g., small premium, large benefit)

102
Q

parole evidence rule

A

once the contract is in written form, all previous understandings are disregarded

103
Q

reformation vs rescission

A
  • reformation - contract is revised to express the original intent of all parties
  • rescission - deems contract void from inception
104
Q

estoppel

A

when a party is denied a right they were otherwise entitled to (e.g., insurer cannot increase premiums b/c of car accident if they said they wouldn’t)

105
Q

waiver provision

A

insurer may see to avoid liability associated with a loss due to agents offering policy changes that weren’t authorized by the company

106
Q

Who are the main insurance rating agencies

A

A.M. Bests

Moddys

Standard and Poors

107
Q

what is policy persistency?

A

policy retention

108
Q

what is modified no fault coverage

A

injured parties do not give up the right to sue, but simply refrain from suing until either a dollar threshold or a verbal threshold is reached.

109
Q

What is Medicare coinsurance and stop-loss limit

A

80/20 and no stop-loss limit

110
Q

what is absolute liability?

A

a situation where someone has undertaken activities or actions that bring about extraordinarily hazardous circumstances

111
Q

how are employer-paid group long term care premiums and the benefits taxed?

A
  • premiums: excluded from income to employee
  • benefits: tax-free to employee
  • deductions: no limit on deduct-ability for premiums to employer
  • can it be included in a cafeteria plan? no
112
Q

collateral assignment vs absolute assignment

A
  • collateral
    • temporary transfer of some or all ownership rights
    • rights revert to the assignor upon satisfaction of agreed-upon conditions.
  • absolute
    • irrevocable transfer of all ownership rights
    • accomplished through sale or gift.
113
Q

split definition of disability

A

starts as ‘Own occupation’ (usually for first 2-3 years) then changes to ‘modified any occupation’.

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