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CFP Extra > Insurance > Flashcards

Insurance Flashcards

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1
Q

Risk Management (severity and frequency)

A

High severity low frequency = risk transfer

High severity high frequency = risk avoidance

Low severity high frequency = risk retention and reduction

Low severity low frequency = risk retention

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2
Q

Indemnity

A

Reimburse for approx loss no more no less

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3
Q

Methods to reinforce indemnity

A

Insurable interesr
Concept of actual cash value
Other insurance
Subrogation (insurer pays claim takes over legal right)

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4
Q

Types of contracts

A

Unilateral one party binding

Adhesion contract accepted as is

Aleatory money spent for benefit is u even

Reformation contract can be amended

Collateral source: measure of damage shouldn’t be mitigated

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5
Q

Provisions for term policies

A

Renewability guarantees policy owner right to renew for limited number of years

Convertibility exchange for permanent life

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6
Q

Medicare Part B coverage

A

Doctors visits
Diagnostic tests
Radiology pathology
Mental illness
Blood transfusion
Physical therapy
Non self admin drug
Preventative care
Out patient
One flu shot
One pneumonia shot

DOES NOT COVER:
Dental, eye, foot, hearing aids and annual vaccination

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7
Q

Non natural person Annuity taxation

A

Income taxes at ordinary rates in year received
Gain is NOT deferred

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8
Q

Business overhead expense insurance

A

Self employed then it is deductible and benefits are tax free
Corps (c and S) premiums NON deductible but benefits are tax free

Covers ongoing costs (1-2 years max) of business expenses if owner is disabled.

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9
Q

Voluntary employees benefit association (VEBA)

A

Employer can establish to pay
Death benefits
Medical expenses
Disability benefits
Legal expenses
Severance
Education benefits

Deductible expense for employer

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10
Q

Section 125 cafeteria plan

A

Cash and non cash options
Term life
Medical insurance
401k

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11
Q

Dependent FSA

A

Max of $5k if both spouses work and make at least that amount
If one spouse is stay at home no
Benefit
Both work but If one spouse makes under $5k then that amount earned is reimbursed

Use for children 13 and under for
Day camp
Before after school care
Late pick up
House keeper
Nanny

Not eligible
Tuition
Older than 13
Late payment
Overnight camp
Field trip
Transportation

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12
Q

Taxation of whole life policy

A

Policy surrendered
Cash value above basis is ordinary income

Cash value = net cash plus loan outstanding

Basis = premiums plus dividends

Net cash takes out loan

Guaranteed cash has loan amount in it

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13
Q

Waiver of premium

A

Available for life insurance. Allows the policy to stay in force with current death benefits and remove additional premium payments

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14
Q

Group term insurance conversion

A

Can only be converted to a cash value plus at the attained age

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15
Q

MEC loan and taxable income

A

take the cash value minus the basis = ordinary income the rest is return of principal
Loans taken before 59 1/2 are subject to 10% penalty

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16
Q

Inherited annuities

A

Beneficiary is taxed similarly to owner if they were to annuities instead of basis use FMV at date of death

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17
Q

Health reimbursement arrangement (HRA)

A

Only c corporations can use
Solely employer funded
Reimburse employee for substantial medical expenses up to max amount per coverage period
High deductible plan

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18
Q

Provisions for life insurance

A

Incontestable - after two years, the validity of a contract can’t be questioned except for fraud

Suicide clause - if within two years the insured dies by suicidal the amount payable by the company shall be the premium paid

Grace period number of days allows for premium in default

APL provision whole life only. If the insured doesn’t pay premium by due date the company will charge it against the cash value

Reinstatement provides for a policy to be reinstated within a specified time period after the date of premium with proof of insurability

Conversion exchange for permanent plan without proof of insurability ( all term plans)

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19
Q

Stock redemption entity purchase

A

Corporation agrees to purchase stockholders interest funded by life insurance

Corporation is the owner and beneficiary

Survivors basis remains unchanged
Life insurance can be attached

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20
Q

Cross purchase

A

One stock holder agrees to purchase a deceased stockholders interest funded by life insurance

Life is insurance is required by each shareholder on the lives of each other

Everyone gets a step up in basis

Life insurance can’t be attached

21
Q

Key employee life insurance

A

Business is owner and beneficiary of key employees life

Nondeductible

Tax free benefits

22
Q

Annuity taxation

A

Contacts after 1982 are taxed LIFO PRIOR TO 1982 FIFO

23
Q

Forfeitures from FSAs

A

Are experience gains
They may be used to reduce plan costs for the following year or returned to the premium payers as dividends

24
Q

Key employee life insurance

A

Spilt dollar: employer and executive share costs

Endorsement method: employer is owner and beneficiary
Employee is not a shareholder
Employer retains cash value of policy
Employees beneficiary gets balance
If employee wants to buy back then costs greater if cash value or premiums paid

Collateral assignment: employee is owner and shareholder
Employee assigns policy
Employer loans it’s share of premium
Employee gets cash value if surrendered and beneficiary get death benefit tax free

25
Q

Capital retention insurance calculation

A

Annual income divided by (return - inflation)
Add one year of income
Which equals total insurance needed

26
Q

Home insurance coverage options

A

Ho 6 policies have coverage A on named perils

27
Q

Vatical settlements

A

If you are terminally I’ll and less than one year to live and suddenly recover you don’t have to pay any taxes on sale. The vatical company would regret their decision because you lived longer and have to pay more premium.

28
Q

Policy sold

A

Transfer of value, death benefits taxed

29
Q

HSAs and LTC

A

Can pay QUALIFIED LTC premiums age based limitations

30
Q

Life settlements

A

CAPITAL GAINS

basis = premiums paid - cost of insurance

Recognized gain = sale price - basis

Ordinary income = cash value - premiums (only counts if your cash value exceeds premiums)

LTCG = recognized gain - ordinary income

31
Q

Jewelry coverage in HO

A

Only covered if THEFT

32
Q

Medical savings accounts

A

Contributions by eligible people are deductible even if you don’t itemize
Employer contributions aren’t included in eligible persons income
Employer and employee can’t contribute in same year

33
Q

Insurance coverage for appliances

A

Insurance will cover

Current replacement cost - ( years used/life * current replacement)

34
Q

Transfer of ownership of policy value for transfer tax

A

It is valued as the interpolated terminal reserve plus the unearned premium

Not necessarily a taxable gift

35
Q

Interpolated terminal reserve plus unearned premium

A

When you own a life insurance policy and you die this amount is included in your estate

36
Q

Dividend option that does not produce income tax

A

Paid up additions

37
Q

Group health insurance eligibility

A

Must work 32 hours a week

38
Q

Domestic partner living with you but doesn’t own house coverage

A

Personal property is NOT covered. The other person should buy a renters policy.

39
Q

Option A life insurance policy death benefit

A

Stated death benefit - loan

If option B = death benefit + cash value - loan

40
Q

When to get LTC

A

When you are still insurable and are at an older age

If you have substantial assets you can self insure

41
Q

Medicare Part B costs

A

Based on enrollee’s AGI two years prior

42
Q

When to apply for Medicare

A

Three months before you turn 65

43
Q

Accelerated benefits rider life insurance

A

Rider pays a portion of policy’s death benefits early if terminally I’ll

44
Q

Divorce and auto policy

A

If spouses don’t live together anymore then who ever is shown as the names insured on the decorations page can keep coverage and the other spouse must obtain new coverage

45
Q

Viatical Settlements taxed

A

Less than 24 months to live = tax free

More than 24 months taxable

46
Q

New basis after loan in MEC

A

Taxable portion of loan CV minus basis = x

New basis is Basis + x

47
Q

1035 exchange insurance basis

A

Basis Carries over

48
Q

Partial disability benefit vs residual

A

Partial = 50% of total disability

Residual: (Earnings - benefit) divided by earnings = X
Benefit multiple by X = benefit

CFP Extra (8 decks)

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