Insurance Flashcards
What risk management techniques do HSAs entail?
High deductible is risk retention; insurance is the risk transfer
Risk transfer
Insurance in other words. For high loss severity and low loss frequency.
Risk avoidance
High loss severity and high loss frequency. Insurance premiums would be prohibitive.
Risk retention and Risk reduction
Low loss severity and high loss frequency. High frequency implies transfer will be costly
Risk retention
Low loss severity and low loss frequency. Minimal financial impact
Good rule of risk management
Consider the potential amount of the possible loss first
Four principles supporting indemnity
- Insurable interest 2. Concept of actual cash value 3. Other insurance (limit the ability to profit from a loss) 4. Subrogation
Cross-purchase agreement
No insurable interest exists for the company
Adhesion
Contracted is accepted “as is” or not at all. Because insurance policies are contracts of adhesion, courts are likely to rule in favor of the insured and against insurer.
Aleatory contract
Insured may pay large premiums and receive no proceeds from the policy.
Subrogation
When insurer pays a claim, it takes over the legal rights its insured had against a negligent third party
Why would a small company use stop-loss coverage to partially self-insure?
Claims over $250k would be paid by insurance company. Under would be paid by employee, employer contributions, and reduced health insurance premium costs.
Elements of insurable risk
Fortuitous and accidental. Not inevitable as element of risk would not be present.
Insuring agreement
Insurance company promises to pay for the loss if the loss should result from the covered perils.
Declarations in insurance contract
Factual statements indemnifying the specific person, property, or activity being insured.
Capital utilization
Factors annuitization to fund future income but leaves no money at the end.
Formula is yearly income ÷ (return - inflation) + money for year 1
Difference between A.M. Best and S&P, Moody’s, and Weiss
A.M. Best provides detailed, historical data on insurance carriers. The others provides ratings
Participating policy
Life insurance policy that pays dividends
Example of absolute liability
Keeping wild animals
Participating policies written by a participating insurance company
They overcharge premiums, and don’t pay dividends if the company loses money
Cost-benefit analysis
Performed by the applicant, not the underwriter
Open perils
The insurer agrees to pay for damage by any peril except those excluded.
Amount paid by insurance formula
Replacement cost x Coinsurance % = Insurance required
(Insurance carried÷Insurance required x loss) - Deductible = Amount paid by insurance
What happens when the amount of the required insurance on dwelling is less than 80%?
Insurance company pays the greater of the ACV or replacement cost (less the deductible)
Describe split limits
First limit is the maximum payable to any one person for bodily injury. Second limit is the aggregate that will be paid for all bodily injury claims. Third limit refers to the aggregate property damage claims.
What policy is vandalism under?
A covered peril under the HO-2 Broad Form Policy
HO-4
A renters policy where you don’t need coverage on the structure. Broad Form coverage on personal property and includes rental payments
Homeowners section II coverage
Addresses personal liability and medical payments to others
Carelessness in a homeowners policy
It is not an exclusion because it is not an intentional loss
Perils included in a personal auto policy
Earthquake, flood, and falling objects. Normal wear and tear are not covered
HO-2 policies vs. HO-3 policies
Damage to an attached garage is covered under Coverage in an HO-2 policy, but damage to a detached garage is protected under Coverage B in an HO-3 policy
Umbrella policy formula
Amount of legal judgement - liability limit
Umbrella liability insurance policy coverage
Provides excess coverage when the limits of the insured’s basic liability coverage are adequate and inadequate
Which employer paid insurance premium is not tax-deductible?
Key employee life insurance
Coinsurance in a family
You have to calculate each person’s coinsurance separately, not all together.
Medigap policy
Available only to individuals enrolled in both Medicare Part A and Part B
Break point
The insurer begins to pay 100% of all medical expenses.
Medicare Part B
Self-administered drugs are not covered. Medicare B benefits have a deductible. Part B is voluntary. Physician charges are covered anywhere in the U.S.
Eligibility for Medicare for family after dropping coverage at 65
The family can elect COBRA coverage for 36 months
Medigap policies
Cover approved expenses not paid by Medicare
Distributions from an HSA
They have to be qualified to be tax-free
COBRA election period
Lasts 60 days after the actual notice of the event to the qualified beneficiary by the plan administrator
Diagnostic tests
Covered by both Medicare Part A (inpatient) and Medicare Part B (outpatient)
Social Insurance Substitute Benefit (SIS)
For total disability, the SIS received is less any social insurance benefits received.
Tax bracket formula for disability benefit
Disability insurance % x salary x (1-tax bracket %)
Residual disability
Provides less than the total disability benefit for the policy’s maximum benefit period
Which situation would Medicare not cover an Alzheimer’s patient going to the hospital?
If there is no hospital stay and when condition isn’t expected to improve
Own occupation definition of total disability
Most likely to pay the benefit to the insured.
How can you reduce premium costs of a disability insurance policy?
Increase elimination period, not buy the COLA rider, and purchase a guaranteed renewal policy
One-year term dividend option in a whole life insurance contract
Pays a death benefit equal to the guaranteed cash value (which increases)
Amount of gain for terminally ill
Always 0
Cash surrender value
Non-forfeiture option which could impose a delay clause
Automatic Premium Loan (APL)
Enables the insurance company to borrow from a life insurance policy’s cash value to pay premiums in default
Universal Life Insurance
Does not provide a guaranteed cash value
Whole life policy fulfills the following objectives
Possible policy loans, cash to pay federal estate tax, guaranteed level premiums
Variable universal Life
Good if the buyer is young with a high risk tolerance
Difference between universal Life and variable life
Cash value in variable is in a separate account. With Universal, it is in a general account.
What does beneficiary receive if owner of a variable universal Life policy dies?
Death benefit and cash value combined
Dividend option through a life insurance policy
One-year term
Sale to a viatical company
Transfer for value that will subject the beneficiary to income tax on the proceeds.
Exceptions to transfer of value rule
A sale or transfer to the insured or a sale to a corporation in which the insured is a shareholder or officer.
Elements of a modified endowment contract
Meets requirements of a life insurance contract, entered on or after June 22, 1988, and fails to meet the seven pay test.
Policy dividends from MECs
Subject to current-year income tax when they are received in cash or used like cash to reduce upcoming premiums or to pay back policy loans. Not taxable when they accumulate with interest.
Entity purchase buy-sell agreement
Premiums are not deductible as a business expense
Death benefits will become tax free
Deceased shareholder’s stock will go up in basis
What happens if a company pays a spouse of the deceased when they don’t have group life insurance?
Amount will be ordinary income and taxable.
Disability and life buy-out agreement
Redeemed stock will result in a gain. After death, the estate will get a step-up in basis.
Life and disability buy-sell agreement
After being disabled, the owner will be subject to capital gains taxation in the sale of his business interest.
What happens when the annuity is owned by an entity who isn’t a natural person?
Income is taxable as ordinary income in the current tax year.
Installment refund annuity
A refund annuity provides annuity payments at least equal to the purchase price of the annuity.
Are annuity contract premiums deductible?
Yes, because annuity contract premiums are deductible when the annuity premiums are paid as a bonus to the employee. The employee owns the annuity.
Distribution from an annuity
The individual’s investment in the contract is treated as a tax-free return of capital.
Waiting period for social security disability benefits
5 months
Group disability insurance program advantages
More liberal waiting period, premiums per insured are lower, and underwriting is more liberal
Premiums paid for group term life insurance
They are treated as a deductible business expense by the company
Key employee in discriminatory group term life insurance
May not exclude from tax the premium for the first $50k of coverage
Non-key employee in discriminatory group term life insurance
May exclude the premium to the first $50k of coverage
FSA 2 1/2 month grace period
Only for medical expenses. Not for dependent childcare.
What is included in gross income for FSA?
Coverage (pay premium) for long-term-care services.
Nonqualified deferred compensation
Not included in cafeteria plans.
Caps for Health FSA and Dependent Care FSA
Health: $3050
Dependent care: $5000
Difference between mutual insurance companies and stock insurance companies
Stock companies typically pay residual profits to stockholders. They issue participating policies.
Advantages of annuity contracts
Offer tax-deferred accumulation when owned by individuals
What is not a dividend option?
A non-forfeiture option including paid-up reduced amount and extended term insurance.
Insurable interest
Not required at the insured’s death.
Single life annuity distribution
Provides the highest periodic payment amount.
Advantage of first-to-die policy
Cost less than two level premium policy as it expires with the first person to die.
Survivorship life
Means second-to-die. Premium is normally less than a premium on insurance for one spouse.
Limited pay whole life
Appropriate when the policy owner wants to pay premiums for a specific number of years.
1035 Exchange
Tax-free exchange and the basis of the life policy (premiums paid) will be carried over into the annuity.
Medicare Part A benefits
Benefits are subject to both a deductible and co-payment s provisions for inpatient hospital care.
COBRA coverage 18 vs. 36 months
18 months includes terminated employees and a change from FT to PT. 36 months is for the family of a deceased worker
Other than collision
Examples include damage to car by an animal and a falling object onto car
Emergency room treatment under PAP
Covered under medical payments
Liability section of PAP
Will provide benefit if sued
When would a car not be eligible under a PAP policy?
When child is a dependent and works and lives in a different state
What’s an example of insurance not providing auto coverage after an accident?
If car is being used for business purposes.
HO-3 policy exclusion
Intentional loss
How do you know if you have sufficient coverage for a home?
When the replacement value is greater than the insurance amount.
Cross-purchase agreement advantage
Gives the survivor a tax advantage with a step-up in basis.
What is an important need for couples with children?
Custodial arrangements for children
Group health insurance conversion
Can convert to an individual health policy, but it’s not very good and expensive
Who is the owner of an endorsement method split dollar variable policy?
Under the endoRsement method of split dollar insurance, the employeR is the owneR.
Split-dollar description
An employee-benefit-type policy application of life insurance, not a key person policy
Collateral assignment method
Split-dollar policy where employee is owner.
Split dollar arrangement total amount of insurance benefit
Premium + paid-up additions + group-life
Why are 529 plans superior to UGMA and UTMA?
Because of kiddie tax
