Insurance Flashcards
Risk Management (severity and frequency)
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
Indemnity
Reimburse for approx loss no more no less
Methods to reinforce indemnity
Insurable interesr
Concept of actual cash value
Other insurance
Subrogation (insurer pays claim takes over legal right)
Types of contracts
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
Provisions for term policies
Renewability guarantees policy owner right to renew for limited number of years
Convertibility exchange for permanent life
Medicare Part B coverage
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
Non natural person Annuity taxation
Income taxes at ordinary rates in year received
Gain is NOT deferred
Business overhead expense insurance
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.
Voluntary employees benefit association (VEBA)
Employer can establish to pay
Death benefits
Medical expenses
Disability benefits
Legal expenses
Severance
Education benefits
Deductible expense for employer
Section 125 cafeteria plan
Cash and non cash options
Term life
Medical insurance
401k
Dependent FSA
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
Taxation of whole life policy
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
Waiver of premium
Available for life insurance. Allows the policy to stay in force with current death benefits and remove additional premium payments
Group term insurance conversion
Can only be converted to a cash value plus at the attained age
MEC loan and taxable income
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
Inherited annuities
Beneficiary is taxed similarly to owner if they were to annuities instead of basis use FMV at date of death
Health reimbursement arrangement (HRA)
Only c corporations can use
Solely employer funded
Reimburse employee for substantial medical expenses up to max amount per coverage period
High deductible plan
Provisions for life insurance
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)
Stock redemption entity purchase
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
Cross purchase
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
Key employee life insurance
Business is owner and beneficiary of key employees life
Nondeductible
Tax free benefits
Annuity taxation
Contacts after 1982 are taxed LIFO PRIOR TO 1982 FIFO
Forfeitures from FSAs
Are experience gains
They may be used to reduce plan costs for the following year or returned to the premium payers as dividends
Key employee life insurance
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
