INSURANCE

Question 1

What is the collateral source rule

Answer 1

The collateral source rule allows that damages for bodily injury can be assessed against the negligent party even when the injured person recovers the amount of his or her loss from other sources.

Question 2

Name the 4 parts to HO Insurance Policy, what they cover and amount covered

Answer 2

Part A - Dwelling = 100%
Part B - Other Structures = 10%
Part C - Personal Property = 50%
Part D - Loss of use = 20%

Question 3

Name the parts to Personal Auto Insurance Policy (PAP) and what they cover

Answer 3

Coverage A: Liability for Property Damage
Coverage B: Personal Liability - bodily injury
individual/incident/property damage
Coverage C:
Coverage D: D1 - Collision
D2 - Other Than Collision - Comprehensive

Question 4

What are the primary components of an insurance contract

Answer 4

Insuring Agreement
Declarations
Endorsements
Conditions

Question 5

What does a contract of indemnity imply

Answer 5

Indemnity means the insured should be restored to the same financial position occupied before the insured’s loss. For example, an actual cash-value settlement would consider depreciation and is an example of the principle of indemnity.

Question 6

What are the different forms of insurance policies and what are each used for

Answer 6

HO-1 = narrowest homeowners insurance coverage that is limited to a specific list of 11 named perils.

HO-2 = Broad form = HO-1, plus two extra perils: damage from falling objects and water damage from accidental overflow of plumbing; heating, ventilation and air conditioning (HVAC); and household appliances. Covers dwelling and structures under named perils with contents coverage up to 50% of dwelling

HO-3 = Special form - covers almost any peril (open perils) except those specifically excluded (such as earthquake, flood, landslide or mudslide, nuclear accident and sinkhole) and cover personal belongings in the home against named perils listed in the policy, contents coverage up to 50% of dwelling

HO-4 = Contents Broad - Commonly referred to as “renters insurance,” this policy form covers personal property in a rented home or apartment.

HO-5 = Comprehensive - Similar to HO-3, any peril losses are covered unless specifically called out for exclusion. Is more comprehensive and covers personal property for almost every peril, unless the item is explicitly excluded. The depth of the coverage makes this policy cost more than others.

HO-6 = Unit Owners - Are designed as insurance for condo owners and co-op tenant owners.

HO-8 = Modified - Is designed for older homes that have a replacement cost that exceeds the actual FMV of the home; often historical homes

Question 7

What are the categories of business general liability

Answer 7

We can categorize business general liability exposures as follows:

Direct Liability
Vicarious Liability
Contractual Liability

Question 8

Names the 4 sections of Medicare and what they cover

Answer 8

Part A = hospital, skill nursing, hospice care
Part B = Non hospital medical costs - dr visits
Part C = Combines Part A (Hospital Insurance) and Part B (Medical Insurance) and most plans cover prescription drugs. Combo plans (like HMO/PPOs)
Part D = Drugs, Prescriptions

Question 9

Which type of liability insurance covers a financial advisor for damages awarded a client due to advisor negligence in business dealings with the client?

Answer 9

Errors and omissions insurance

Question 10

Which optional feature of an individual disability income insurance policy allows for a larger amount of additional coverage to be added to a policy at a specified age, after a specified number of years, or at after specific life event, such as marriage?

Answer 10

Guaranteed Insurability Option. The insured does not have to prove health insurability but must qualify financially for the increased benefit.

Question 11

How long is the the Medicaid “look back” period for calculation of assets

Answer 11

Property transferred to individuals, charities, or a trust within 60 months of application for Medicaid is considered as owned by the applicant and must be disclosed.

Question 12

What is the stop loss limit and how is it calculated

Answer 12

The stop-loss limit is the amount of total expenses after payment of the deductible to which the insured’s portion of the coinsurance will result in reaching the Max Out Of Pocket costs.

The following calculation to determine the stop-loss limit:

(MOOP - Deductible) ÷ Insured’s Coinsurance Percentage

Question 13

What is the triple-trigger theory relative to establishing liability and the elements of each

Answer 13

If several insurance policies were in force when a developing injury is in progress, all the insurers would be responsible for providing coverage. This is called the triple-trigger theory.

• Exposure:The insurer whose policy was in force when the first exposure to hazardous substance occurred.
• Manifestation:The insurer whose policy was in force when the disease was first recognized.
• Exposure-in-residence period:The insurer whose policy was in force when the disease developed.

Question 14

What is vicarious liability

Answer 14

Vicarious liability is an indirect liability that arises when a firm hires an independent subcontractor, who in turn injures a third party. This liability can be extend to intentional wrongs acts done by employees or agents of an organization that cause harm to a third party. These include actions such as assault and battery.

Question 15

What is a presumptive disability clause

Answer 15

It is common to include a definition ofpresumptive disabilityin policies that provide benefits for total disability.

Under a presumptive disability clause, an insured is always considered totally disabled, even if he is at work, if sickness or injury results in the loss of the sight of both eyes, the hearing of both ears, the ability to speak, or the use of any two limbs.

Question 16

How do disability contracts define disability?

Answer 16

Disability contracts typically define disability in one of three ways (unable to do version of current occupation):
* Own occupation definition, which is usually referred to as “own occ.” (ie,,,disability restricts precise occupation ie..surgeon)
* Modified own occupation, with a time limit (e.g. 2 years) on “own occ” protection. (2 yrs own occupation then any occupation after that)
* Any gainful occupation definition, which is commonly, if somewhat inaccurately, called “any occ.” (ie..disability restricts any job)

Question 17

What is Completed Operations Insurance

Answer 17

Completed Operations Insurance covers claims from injuries arising after a service is rendered and the property’s control is returned to the owner.

Question 18

To be categorized as a qualified LTCi policy, which features must be included?

Answer 18

• Be guaranteed renewable
• Not provide a cash value for any reason other than upon full surrender or death of the insured
• Other than at full surrender or death, any dividends or refund may only be used to reduce future premiums or increase future benefits.
• Generally, policies must not pay for services that would be covered by Medicare, unless Medicare is specified as a secondary payer.

Question 19

What factors must be in place for a qualified accelerated death benefit

Answer 19

The insured must be terminally ill.
The reduction of the remaining face value of coverage is limited.
The cash value of the remaining death benefit may not be reduced.

Question 20

What are requirements for tax treatment of viatical settlements

Answer 20

• Terminally ill individuals may use all proceeds tax free
• Chronically ill individuals may use to cover medical expenses for long term care tax free but any other non medical use will be taxed as ordinary income at tax rate

Question 21

How many life insurance policies must be purchased under a partnership cross purchase plan

Answer 21

• Thecross-purchase planis where each partner or shareholder can purchase life insurance on every other partner or shareholder.

With a cross-purchase plan, the number of policies needed is equal to:

n x (n - 1), where n equals the number of partners or shareholders.

• Theentity planis where the partnership or corporation can purchase the insurance on each partner or shareholder.

With an entity plan, the number of policies needed is equal to the number of partners or shareholders.

Question 22

When annuitizing a life insurance contract, how do you determine the amount that is not-taxable for current period

Answer 22

Use the exclusion ratio to determine the portion of each annuity payment that represents a return of basis (tax-free amount).

Exclusion Ratio:

(Basis in Contract ÷ Expected Total Payments - annuity payment * periods of payment) x Annuity Payment Amount = Return of Basis.

eg: Rosalita had paid $150,000 of premium payments into the contract. The expected annual annuity payment is $22,500 for 16 years.
($150,000 ÷ [$22,500 x 16]) x $22,500
($150,000 ÷ $360,000) x $22,500 = $9,375 (tax-free return of basis)

Question 23

If the insured forgets to pay the premium or decides to end the contract, the grace period provides _______ to pay the premium without forfeiting any contractual rights and no questions asked.

Answer 23

31 days

“If the insured forgets to pay the premium or decides to end the contract, the grace period provides 31 days to pay the premium without forfeiting any contractual rights and no questions asked”

Question 24

What are the key features of credit life insurance

Answer 24

Credit life insurance is often sold in conjunction with a major purchase.

It typically is much more expensive than traditional term life insurance.

The premium does not increase each year and

The benefit decreases each year to coincide with the outstanding loan balance.

Question 25

In legal terminology, what do you call ownership rights evidenced by something tangible or intangible?

Answer 25

In legal terminology, ownership rights evidenced by something tangible or intangible is called chose.

There are two types of choses:

Choses in possession
Choses in action

Question 26

What are the primary different types of life insurance policies

Answer 26

Term - Fixed term limit for fixed dollar amount.

Permanent - Intended to provide insurance protection over one’s entire lifetime.

Within these categories are broken into

Term ———— Universal —————Whole Life

Question 27

What are the key features of Term life insurance

Answer 27

Term
- Is often referred to as “pure protection” or “pure insurance” because it pays a
death benefit only and has no savings component.
- Fixed term limit for fixed dollar amount.
- No investment or saving vehicle;
- Furnishes protection for a limited number of years at the end of which the policy expires, meaning that it terminates with no maturity value.
- It may be convertible to permanent
- May be participating - paying dividends.
- Least expensive;
- 3 different options for premiums:
(1) Level term: Set premiums over the life of guaranteed term; Premiums increase
upon expiration of initial guaranteed term
(2) Decreasing term: Typically associated with loans such as mortgage with level
premiums over term
(3) Annual Renewable: 10, 20, 30 yr term with first to die (payout when first
insured dies) or second to die (payout when last insured dies; used for
handling estate taxes

Question 28

What are the different categories of health insurance

Answer 28

Health insurance policies fall into categories where the cost of injuries or sickness is covered, and those that pay benefits because of physical or mental incapacity.

Health insurance can be classified into three categories:

Medical expense insurance,
Long-term care insurance, and
Disability income insurance.

Question 29

What are the different dividend options for a participating Whole Life Insurance Policy

Answer 29

CRAPO

Cash - distribution

Reduce premiums - Applied against out of pocket premiums

Accumulate at interest - Dividends are invested and tax free up to clients basis in the policy (cash value of premiums paid); Any interest paid on dividends are taxable

Paid Up Additions - Used to purchase additional insurance face amount for insured regardless of health or occupation

One-year term - Adds term insurance each year to the policy face amount equal to cash value of the policy..AKA 5th Dividend Option

Question 30

What are the key features of Whole life insurance

Answer 30

• Intended to provide insurance protection over one’s entire lifetime. Also known as Permanent Life
• The face amounts payable under whole life policies typically remain at the same level throughout the policy duration, although some policies pay dividends to increase the total amount paid on death;
• In most whole life insurance policies, the premium also remains at the same level throughout the premium payment period.
• Higher premiums than term insurance at issue
• Savings component as it builds cash value
• Cash can be accessed via loan or withdrawal
• May be participating paying dividends with similar payout options as term
• Different types of whole life:
  (a) Ordinary life
  (b) Variable life - Cash value is invested in securities with opportunity to earn
  higher returns; but death benefit and cash value fluctuate based on investment
  performance
• Has separate accounts for cash value (like mutual funds) and not part of Insurance
  Co general account…so in event of bankruptcy, funds in sub-account not
  accessible by creditors

Question 31

What are the key features of Universal life insurance

Answer 31

Universal -
- Combines the low-cost nature of term and the cash value features of whole life insurance.
- This new hybrid product was to be more flexible than its predecessors with features that allowed the insured to determine whether it would function more like term or more like a whole life policy.
- Provides for 2 options for payout at death
- Option A = death benefit remains level - constant
- Option B = death beneift is face amount plus cash value
- Can be held as
- Fixed Universal (no investment choices, provider handles),
- Variable Universal (cash value sub accounts allowing for investor choices) and
- Index Universal (investments tied to market index funds)

Question 32

What are the key features of whole life and different types of policies?

Answer 32

Whole Life has a guaranteed death benefit with guaranteed premiums;

(A) Ordinary Whole life premiums are paid until age 120 or death; Cash value increases to face value at age 120 and death benefits are level throughout the term of the policy

(1) Variable Whole Life allows for multiple investment options; Death benefits and cash value fluctuate

(2) Survivorship Whole Life or Universal Life - Also called “second-to-die” policy, this product insures two people and costs much less than two separate policies. The original use for this policy was to cover estate taxes payable at the death of a surviving spouse. It can also be a more economical way to cover two parents for minor children, for charitable planning or wealth transfer.

(3) Limited Pay Whole Life- Premiums are higher than ordinary Life Insurance because insured only pays until a certain age

(4) Graded Premium Whole Life - Insureds buy a Whole Life policy and then pay a gradually increasing premium which creates a cash value over time that is sufficient to fund the cost of death benefits over the life of the policy. Earnings accumulate tax-free until the policy is cashed in, or the policy owner can borrow cash up to the cost basis.

(5) Modified Endowment Contracts - Life insurance policies with a high amount of cash value buildup. If a policy’s premiums equal or exceeds a 7-pay premium, the policy is a MEC which means:
* Any funds withdrawn are subject to “last-in, first-out” taxation so investment income is withdrawnfirst
* a 10% penalty applies to cash withdrawal or loan before age 59 ½.

(6) Guaranteed Issue Whole Life

Question 33

What are implications of permanent life insurance loans

Answer 33

Automatic premium and face value benefit loans are loans against the policy which will be deducted from the death benefit and reduce coverage. They are imputed at a stated borrowing interest rate

Question 34

Which individuals or entities are considered exceptions to the transfer for value rule when an insurance policy is transferred between parties.

Answer 34

The insured.
The insured’s partner.
The transferor’s spouse incident to a divorce.
A new owner who takes the transferor’s basis in the contract.
To a partnership in which the insured is a partner.
To a corporation in which the insured is a shareholder or officer.

Question 35

What is open rating as it relates to insurance company posting premium rates

Answer 35

Open rating allows an insurer to use whatever rate it chooses after filing the rate and the supporting statistics with the regulator. Open rating, the more popular scheme, allows the regulator to disapprove any rates being used.

Question 36

Brody purchased a whole life insurance policy 15 years ago when he was 45 years old. He decides to retire at age 60 and he withdraws cash value from his life insurance to buy a custom acoustic guitar.

Assume Brody’s total premiums were $70,000. Over 15 years, he received $35,000 in dividends.

Calculate the amount subject to tax when Brody withdraws $45,000 in cash value from the policy.

$45,000
$0
$10,000
$35,000

Answer 36

If the insured withdraws the savings value of the insurance and if this value exceeds the insured’s adjusted basis, the excess is subject to federal income tax in the year of the withdrawal.

Given these facts, $10,000 of the withdrawal would be subject to tax, calculated as follows:

Adjusted basis = Premiums paid – Dividends received

$70,000 - $35,000 = $35,000 (adjusted basis)

$45,000 (withdrawal) - $35,000 (adjusted basis) = $10,000 (subject to taxation)

Question 37

Under Section 1035(a), which insurance policy exchanges will be exempt from any recognized gain or loss?

Answer 37

Under Section 1035(a), no gain or loss shall be recognized on the exchange of the following insurance policies:

• A contract of life insurance for another contract of life insurance or for an endowment or annuity contract; or
• A contract of endowment insurance
  (A) for another contract of endowment insurance which provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged, or
  (B) for an annuity; or

An annuity contract for an annuity contract.

Question 38

How are disability income benefits taxed

Answer 38

1) If Employer paid - Benefits received are taxable

2) If Employee paid after tax - Benefits are tax free

3) If Employer pays portion and Employee pays portion:
- If included as comp to employee then benefits are tax free
- If paid with pre tax $, % employer paid is taxable

Question 39

What is Business Overhead Disabilty Insurance and tax implications?

Answer 39

A business overhead expense disability policy pays the insured’s business overhead expenses if the insured becomes disabled. The policy is designed for small businesses that rely on one or two persons.

The basic rule of thumb about tax deductibility on disability insurance premiums for a business boils down to one thing. The business can deduct for premiums paid on the employees but not the owner. The exception is if the business is incorporated and the owner is considered an employee of the business.

Question 40

Name the type of business insurance coverage based on definitions below:

A) Covers favorable terms in a lease agreement should a fire render a building uninhabitable.

B) Covers expenses caused by the occurrence of a loss to a covered peril which the insured does not own.

C) Covers indemnity for businesses during the period where they are rebuilding and restoring after covered losses have forced a halt of business as usual.

D) Covers any extra expenses incurred to continued operation.

Answer 40

Option “A” is leasehold interest coverage.
Option “B” is contingent extra expense insurance.
Option “C” is business interruption insurance:
Option “D” is extra expense insurance.

Question 41

What are penalties for non qualified distributions from HSA

Answer 41

If a non-qualified distribution is made from an HSA, the distribution will be subject to income tax and a 20% penalty. The penalty will be waived if the individual has attained age 65 (not 59½).

Question 42

What is principle of indemnity

Answer 42

Under the principle of indemnity, an insured should collect the amount of their loss; no more, no less. In insurance terminology, that value is called the actual cash value (ACV) of the loss

Question 43

What are various needs analysis for life insurance and how determined

Answer 43

Life insurance sufficiency analysis requires consideration of multiple factors. These factors include financial needs, health, and benefits. Health insurance coverage is the least relevant coverage in performing a life insurance sufficiency analysis.

Human value needs

Life income needs?

Question 44

What is advantage of HSA relative to FSA

Answer 44

HSAs can be used to pay long term care insurance premiums, subject to limits based on age, which are published by the IRS and are adjusted annually. An HSA is an account established to pay for qualified medical expenses, including qualified long term care costs and long term care insurance premiums. Contributions and withdrawals are tax-free for qualified expenses.
FSAs can not

An HSA contribution made through payroll deduction is exempt from Social Security (FICA) taxes. However, FSA contributions are also exempt from Social Security tax. Therefore, this is not an advantage of an HSA over an FSA

Question 45

What does an individual disability income insurance policy that contains a nonoccupational clause, allow for?

Answer 45

Benefits payable from the disability policy will be offset by workers’ compensation benefits received

Question 46

How are distributions from post 1982 variable annuity contracts valued and taxed

Answer 46

The contract is subject to LIFO basis recovery on withdrawals prior to the annuity start date, meaning ordinary tax on earnings and subject to 10% penalty if withdrawn prior to 59 1/2 or not due to death, disability, terminal ill; After that any basis is withdrawn tax free

Question 47

What are different Life Insurance Nonforfeiture Options

Answer 47

Cash Surrender value -
Reduced Paid Up Insurance -
Extended Term Insurance -

Question 48

Which are mandatory benefits that must be offered by Medicaid programs?

Answer 48

Home Health Services.

Outpatient and Inpatient Hospital Services.

Transportation to Medical Care.

Physician Services.