Insurance Flashcards
annual renewable term
- term insurance
- premium increases annually
- no cash value
- death benefit is fixed
- can be converted to permanent policy w/o proving insurability
decreasing term
- premiums are level
- death benefit decreases over time
- can usually convert to permanent without evidence of insurability
universal life
premium, DB, investment control, return, uses
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
universal life A vs B
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
variable universal life
premium, DB, investment control, return, uses
- 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
whole life (aka ordinary life)
premium, DB, investment control, return, uses
-
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)
options for life insurance dividends
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’)
types of whole life
aka ordinary life
- 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
MEC
- 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
incontestibility
once the policy has been in force for a certain time (typically 2 years), insurance company will not contest the policy
Absolute assignment
policy provision
owner transfers all policy rights (usually due to divorce)
collateral assignment
policy provision
use insurance as collateral for debt
limited ownership rights; terminates when debt is satisfied
reinstatment
typically requires back payment of premiums and evidence of insureability after grace period
Transfer for Value Rule and exceptions
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)
What Viatical settlements are and how they’re taxed
- 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
speculative risk
chance of a loss or a gain
risk management tools
- 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)
law of large numbers
the more people who are insured the more likely it is that the actual losses will equal expected losses
peril vs hazard
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)
requisites of insurable risk
- large number of exposure units
- losses have to be accidental
- not catastrophic for insurance company
principle of indemnity
insurance makes you whole, but you cannot profit from it
subrogation clause
insured cannot receive compensation from both insurer and third party for the same claim
insurance company has the right to collect on your behalf
general vs independent agent
- general - represents one insurer
- independent - represents multiple, unrelated insurers
actual cash value
replacement cost less depreciation
does home and other property insurance typically cover replacement cost or actual cash value?
home - replacement
property (e.g. auto) - actual cash value
how much is covered if an individual has sufficient insurance vs when they dont carry insurance minimums
will pay the greater of actual cash value or formula:
(amount of coverage carried / coinsurance requirement) x loss - deductible
who regulates insurance?
state, not federal
legislative branch
enact laws that provide for licensing agents, doing business, in a particular state
judicial branch
rules on constitutionality of laws passed by legislative branch
executive branch or state insurance commissioner
administrators
interpret and enforce insurance laws
member of NAIC
federal oversight of insurance
IRS, SEC, and ERISA have oversight when applicable, but primarily regulated at state level
NAIC
- provides watch list of insurance companies based on financial ratios
- no regulatory power
- issues model legislation
- accredits state insurance regulatory offices
steps of risk management
DIEDIE
- determine objectives
- identify risks
- evaluate risks (probability, occurrence, loss)
- determine alternatives for managing risk
- implement
- evaluate, monitor, review
capital needs approach vs human value approach
- capital needs approach - amount needed to fund income needs, education, retirement funding
- human value approach - amount of income earned less amount consumed by insured
Cross Purchase vs Entity Purchase
- 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
How are premiums and death benefit treated from a tax perspective for key person insurance
Premiums are not deductible as business expense
DB received tax-free
equity indexed annuities
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
pure life annuity vs life annuity with guaranteed minimum payments
- 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
installment refund annuity
payments continue until death
if annuitant doesn’t get back what he paid in, he gets a refund for the difference
how are annuities taxed once annuitized?
Exclude from tax based on % of payment that is basis
basis / total payments = exclusion ratio
viatical settlements
- 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)
how are withdrawals from annuities taxed before annuitized?
- pre-August 14, 1982 - FIFO
- post-August 13, 1982 - LIFO
Major medical health insurance
- hospitalization, physician and surgeon fees, PT, prescriptions (HPPPS)
- unlimited lifetime and annual limits
- eye and dental excluded
- usually 80/20 coinsurance with MOOP
Does MOOP include the deductible?
Yes
Patient Protection Affordable Care Act
- 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
PPO
- network of health care providers
- provider offers discount on services
- better coverage within network
HMO
what is it and what are the staff, group and IPA models
- 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
HSA exclusions from coverage
cosmetic surgery and over-the-counter drugs if no prescription
HSA penalties for non-medical expenses
- tax + 20% penalty if <65
- tax if 65 or older (no penalty)
moral vs morale hazard
moral: character flaw (filing false claim)
morale: indifference due to having insurance (e.g., leaving keys in the car)
non-forfeiture rights vs settlement options vs dividend options
-
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
when can insured start using long-term care insurance
when unable to do 2 of 6 ADLs
severe cognitive impairments where care is required to protect their health and safety (alzheimers)
ADLs
eating, bathing, toileting, transferring, dressing, continence
note: walking is not an ADL
direct recognition program
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
can the owner of a life insurance policy borrow from the CV if an irrevocable beneficiary is named?
Yes, but only with approval from the beneficiary
non-cancelable policies
(what is it and do premiums change)
guaranteeing right to renew
premium is fixed
guaranteed renewable
(what is it and do premiums change)
right to renew
premiums may be adjusted by insurer
how to be eligible for COBRA
- 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)
which employers does COBRA apply to?
- has a group health plan
- 20+ FT employees
how long must employers offer COBRA?
- 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)
long term care types of coverage
- skilled nursing
- intermediate nursing
- custodial care
- home health care
- assisted living
- adult day care
- hospice
how are long term care premiums and benefits taxed
- 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
what makes a long term care policy qualified
- no surrender value
- dividends used for reduced premiums or more benefits
- doesn’t may for expenses covered under Medicare
- meets consumer protection laws
modified any occupation (disability)
considered disabled if unable to perform job that reasonably fits education, experience, training, and prior economic status
duration of short-term disability
typically 2 years or less
elimination period (disability)
amount of time until benefits begin
HO Section I (Coverage A, B, C, D)
what are they and typical coverage
- 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
Basic named perils vs broad named perils for HO insurance
- basic - there are 12
- broad - there are 6
- (don’t need to memorize them all)
open peril policy
everything is covered unless exclusion
exclusions: usually neglect, flood, earthquake (sudden and accidental)
General exclusions for all HO policies
- movement of ground (earthquake, landslide)
- ordinance of law
- damage from water (floods, sewer backup)
- war/nuclear
- power failure
- intentional act
- neglect
HO Section II (Coverage E, F)
- 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)
HO 1-6, 8, 15
- 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
when is a flood policy typically in force?
typically 30 days before coverage begins unless area just became a qualified flood zone or it’s a mortgage requirement
inland marine insurance
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
Auto policies part A
what is it, what does it include, what are amounts
- 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)
auto policies part B
- 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
auto policies part C
- uninsured motorists
- uninsured or under-insured driver must’ve been at fault
- exclusion - auto used in business
auto policies part D
- 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
auto policies part E and F
- 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)
no fault auto insurance
required in specific states; each party files a claim and collects from their own policies for injuries/medical claims
contributory negligence vs comparative negligence vs Last Clear Chance
- 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)
exam tip - who needs a PLUP?
everyone; $1M coverage
CLUP
commercial liability umbrella policy
what % is FICA tax?
- 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
how social security is impacted if it is taken early or late
- 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
definition of disability for social security
expected to last for 12 months or result in death and you cannot perform duties of any occupation
who qualifies for Medicare?
- >65
- disabled (according to social security) for > 2 years
- spouses can qualify at 65 based on their spouse’s work record
who qualifies as fully insured for social security benefits
40 quarters making $1510/quarter in wages
who qualifies as fully insured for disability
- 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
who can receive someone’s social security benefits?
- 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%)
currently insured
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
what happens to social security benefits if you draw on benefits early but keep working
benefits are reduced $1 for every $2 you earn above earnings limitation (on formula sheet) (wages only; not pension income)
taxation of social security benefits
- up to 85% based on AGI + nontaxable interest + ½ SS benefit
- 1st hurdle: $25K single; $32K MFJ
- 2nd hurdle: $34K single; $44K MFJ
Medicare Part 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)
Medicare Part A deductible and coinsurance
- 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
Medicare Part B
exclusions, premium, deductible
- 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%
Medicare Part C
- 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
Medicare Part D
- prescription drugs
- also requires monthly premium, deductible and coinsurance
Where does Medicare provide coverage?
in-US only unless closest hospital is in a foreign country
how to apply for Medicare
Automatic at age 65 if you are already receiving SS; Must enroll if not
aleatory
money exchanged my be unequal (e.g., small premium, large benefit)
parole evidence rule
once the contract is in written form, all previous understandings are disregarded
reformation vs rescission
- reformation - contract is revised to express the original intent of all parties
- rescission - deems contract void from inception
estoppel
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)
waiver provision
insurer may see to avoid liability associated with a loss due to agents offering policy changes that weren’t authorized by the company
Who are the main insurance rating agencies
A.M. Bests
Moddys
Standard and Poors
what is policy persistency?
policy retention
what is modified no fault coverage
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.
What is Medicare coinsurance and stop-loss limit
80/20 and no stop-loss limit
what is absolute liability?
a situation where someone has undertaken activities or actions that bring about extraordinarily hazardous circumstances
how are employer-paid group long term care premiums and the benefits taxed?
- 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
collateral assignment vs absolute assignment
-
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.
split definition of disability
starts as ‘Own occupation’ (usually for first 2-3 years) then changes to ‘modified any occupation’.
