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CFP Exam > Insurance > Flashcards

Insurance Flashcards

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1
Q

What is Risk?

A

A condition where there is a possibility of loss (a situation where exposure to loss exists).

  • Starting a business
  • Buying real estate
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2
Q

What is Peril?

A

The CAUSE of a loss, the event insured against:

  • Fire
  • Windstorm
  • Theft
  • etc.
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3
Q

What is a Hazard?

A

A CONDITION that may create or increase the chance of loss arising from a peril.

  • Owning a home on an earthquake fault
  • Owning a home by a rive
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4
Q

What are the Elements of Insurance?

A
  • Large number of homogeneous exposure units
  • Loss must be definite and measurable
  • Must be fortuitous or accidental
  • Must not be catastrophic (for the insurance company

*diversified risk coverage for accidents and not catastrophic

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5
Q

What are the Methods to Avoid/Reduce Loss?

A
  • Avoidance: Do not drive, Do not purchase a home but rent
  • Diversification: Duplication of assets or activities at different locations
  • Transference: INSURANCE
  • Retention: Voluntary - Recognizes that the risks exist and assume losses (deductible, coinsurance)
  • Risk Reduction: Sprinkler system, safety programs
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6
Q

What is Insurable Interest?

A
  • Property and Casualty: At inception and at time of claim
  • Life: At inception, but need not be at time of claim
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7
Q

What are the Parts of the Insurance Contract?

A

D-D.I.C.E

  • Declarations Page: Factual Statements that identify the specific person, property or activity being insured.
  • Definitions: Explanation of key policy terms
  • Insuring Agreements: Spells out the basic promise of the insurance company
  • Conditions: Spells out in detail the duties and rights of both parties.
  • Exclusions: Circumstances when the insurer will NOT pay.
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8
Q

What are Negligences?

A
  • Attractive Nuisances: Swimming pool, vacant lot (can attract kids)
  • Negligence per se: Violation of a statute
  • Strict Liability: Product Liability
  • Absolute Liability: Workers Comp, hazadous
  • Vicarious Liability: Respondeat superior (principal’s liability for their agents).
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9
Q

What are Insurance Payout Defenses?

A

Trying to get out of paying out insurance.

  • Assumption of Risk (skiiing, car racing)
  • Contributory (jay walking, being drunk)
  • Comparative (A is 20% negligent, B is 80%)
  • Last Clear Chance (Rear end someone when you could have avoided it by swerving, braking in time)
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10
Q

How to Calculate Life Insurance Needs

A

Capital Utilization Approach: How much money you need for cash flow/expenses. Nothing left over.

Capital Needs Approach: Get a payout and invest it, using the interest to cover expenses.
- The original capital is still left at the end of the period (also called Capital Retention or Interest Only).

Total Insurance Payout: (Annual Amount Needed/real rate of return) + 1st year expenses (can’t wait)

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11
Q

Best Insurance Rating Agencies

A

A.M. Best: A++ to F
Standard & Poor: AAA to CCC

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12
Q

Home Owners Insurance: Sections and Coverage

A

Section I (Coverage: A B C D): Structures and Property

A - Dwelling and Attached Structures
B - Other structures, separate from dwelling (detached garage, fences, sheds)
C - Contents and Personal Property
D - Loss of Use

Section II (Coverage: E F): Liability and Medical Expenses
E - Liability
F - Medical Payments

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13
Q

Personal Property Coverage: Exclusions

A
  • Animals, Birds, or Fish
  • Motorized Land Vehicles and Aircraft
  • Property of roomers, boarders or other tenants
  • Property contained in an apartment regularly rented or held of rental to others by the insured (unless specifically endorsed)
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14
Q

Home Owners Policy Perils Coverage: Basic

A

Study Hint: Remember: WHARVVES/FLTS

Basic Insurance Coverage
- Windstorm
- Hail
- Aircraft
- Riot
- Vandalism
- Vehicles
- Explosion
- Smoke
- Fire
- Lightning
- Theft
- Sinkhole

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15
Q

Home Owners Policy Perils Coverage: Broad

A

Study Hint: Remember Basic plus RAFF

  • Rupture of a System
  • Artificially Generated Electricity
  • Falling Objects
  • Freezing of Plumbing

“A falling electric freezer ruptured “

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16
Q

Home Owners Policy Perils Coverage: Exclusions

A

“OPENN WIF”

  • Ordinance/Law
  • Power Failure
  • Earthquake
  • Nuclear Hazard
  • Neglect
  • War
  • Intentional Loss
  • Flood
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17
Q

Calculate Replacement Cost Coverage

A

Replacement Cost Coverage Usually: Residential 80%, Commercial 90%

Replacement Cost x Coinsurance Percentage = Insurance Required

Actual Insurance / Required Insurance x Loss - Deductible = Amount Paid by Insurance

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18
Q

Auto Policy: What are the requirements for a vehicle to be eligible for:

Insurance Services Office (ISO)
Personal Auto Policy (PAP)

A
  • Be owned by an individual or by a husband and wife living in the same household
  • Be private passenger auto*
  • Not be used as public or livery conveyance
  • Not be rented to others
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19
Q

Auto Policy:
What are the Parts of an Auto Insurance Policy?

What do they cover?

A

L.M.U.D.

Part A - Liability to third parties
Part B - Medical payments
Part C - Uninsured/Underinsured motorists
Part D - Damage to the covered auto

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20
Q

Auto Policy:
What is classified as a “Covered Auto” under an Auto Insurance policy?

A

Any vehicle shown on the declarations page
Any of the following which you acquire during the policy period:
- Private Passenger Auto
- Pickup Truck
- Panel Truck or Van
- Any trailer you own listed on the declarations page
- Any auto or trailer you do not own while used as a temporary substitute for any vehicle described herein which is out of normal use because of a breakdown, repair, servicing, loss or destruction

NO coverage for any of these used in a business (need a commercial policy for that)

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21
Q

Auto Policy:
Who are the Persons Insured under medical payments coverage of the PAP?

A
  • Anyone (family and non-family) in the insured car
  • The insured and family members struck by another car as a pedestrian
  • The named insured and any family member who suffers bodily injury caused by accident while occupying covered vehicle
  • The named insured and family members who if, while a pedestrian, are struck by any motor vehicle designed for use on public roads or by a trailer
  • Other persons while an occupant of the insured’s auto (passengers)
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22
Q

Auto Policy:
What is Uninsured Motorist Coverage (UM)?

A

This agreement promises to pay the amount an injured insured could have collected from the uninsured driver if such driver had carried auto liability insurance. The term “covered person” as used under the uninsured motorist coverage of the PAP includes the following:

  • The named insured and any family member
  • Any other person occupying the insured’s covered auto
  • Any person, for damages that person is entitled to recover because of injury to a person described above

Note: UM is liability protection, NOT medical payments

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23
Q

Auto Policy:
What are the perils covered under the “Other Than Collision” Provision of an Auto Policy?

A

Loss caused by:

  • Glass Breakage
  • Falling Objects
  • Fire
  • Theft
  • Explosion
  • Earthquake
  • Windstorm
  • Hail
  • Water
  • Flood
  • Riot or Civil Commotion
  • Contact with Birds or Animals
24
Q

Umbrella Liability Insurance: Benefits

A
  • Nearly always a correct answer since it is smart coverage
  • Provides LIABILITY coverage (BI/PD) for catastrophic claims
  • Requires policy owner to carry certain underlying coverage of specified amounts
  • Professional acts are specifically EXCLUDED!
25
Q

Professional Liability: What are the two types Professional Liability Insurance and who/what does it cover?

A

Malpractice - Bodily Injury (doctors, dentists)

Errors and Omissions (E&O) - Monetary damages (financial advisors, lawyers, accountants, insurance agents)

26
Q

What does Worker’s Compensation cover?

A
  • Unlimited Medical Expenses
  • Disability Income (TAX FREE)
  • Death Benefits
  • Rehabilitation (Medical and Vocational)
  • Absolute Liability (hazards)
27
Q

Medicare: Doesn’t Cover

A
  • Routine foot care, glasses, hearing aids, and dental
  • Emergency Care outside the US (some exceptions for Canada, Mexico and Caribbean)
28
Q

Medicare: Long-Term Care Limitations (Skilled Care)

A

Benefits are Limited: Pays all of the first 20 days of SKILLED care and everything over a specified amount per day for the next 80 days of SKILLED care (100 day max)

The Limited Benefit is Subject to Substantial Restrictions: Pays for SKILLED care only:

  • Admission to a nursing home must follow within 20 days of the hospital stay of three days or more
  • The patient’s condition must be expected to improve
29
Q

Compare HMO vs PPO

A

HMO:

  • Provider paid monthly fee regardless of services rendered (Capitation)
  • Pay a fee, get all services as defined
  • Out of Network care NOT COVERED at all

PPO:

  • Provider paid for actual services rendered
  • Out of network partially covered, usually 70%
30
Q

COBRA: Requirements and Qualifying Events

A

Company Requirements to Provide
- Must have 20 Full/Part-Time Employees. Doesn’t matter how many are covered.
- If company has 21 employees and only 5 have health care, the 5 still get COBRA coverage
- The option to buy Continuation (non-cancellable, guaranteed renewal).

Coverage must be offered to: (Qualifying Event?)

18 Months
- leave firm (terminated, voluntary, FT/PT)
- employee, spouse, dependent

36 Months
- death, divorce, legal separation, or eligibility for Medicare
- Children: dependent status change, age limit in plan

COBRA Charges For Continuation: can be 2% over the original cost of the premium of the group plan

31
Q

HSAs

A
  • Used in conjunction with High Deductible Health Plan (HDHP)
  • Distributions are tax free if used for health care
  • Contributions not spent are carried forward and portable
  • Unused assets become property of named bene on death
  • Distributions for non-medical are ordinary income plus 20% penalty if under 65
31
Q

Disability: When Companies Need to Pay (Occupation)

A

Insurance company needs to pay if you can’t perform own occupation, any occupation

Own Occupation - Best definition for the insured. Can you perform your own job? No - get paid

Any Occupation (Social Security definition). Can you perform any job? Yes - don’t get paid. Can you not perform any job? No - get paid
- Loss of Income

Coverage Split Definition - Own occupation coverage then modified any occupation

32
Q

Disability: Policy Continuation Coverage Provisions

A

How to Keep Coverage (Policy Continuation Provisions)

  • Noncancellable “Noncan”: Continuous term policy guaranteeing the insured’s right to maintain the policy at the stated premium
  • Guaranteed Renewable: Continuous right to maintain the policy, but the insurer may increase the premium by class of insureds
33
Q

Disability: Taxation of Premiums and Benefits

A

Taxation of Premiums and Benefits:

The individual owns the contract and pays the premium:
- Premiums are not deductible
- Benefits are tax free to the employee

The employee owns the contract and the employer pays the entire premium under a bonus arrangement like section 162 disability insurance:
- Premiums are deductible by the employer as a bonus
- Benefits are tax free to the employee (the employee “pays” the premium as a bonus the salary deduction).

The employee owns the contract and the employer pays the entire premium under a salary continuation plan (group plan - company pays out the benefits).
- Premiums are deductible by the employer
- Benefits are taxable to the employee

34
Q

Life Insurance: Permanent

A

Whole Life / Universal Life
- low risk tolerance
- Insurance company controls the investment return
- Assets part of the general account

Variable Life/Variable Universal Life
- high risk tolerance
- Client controls the investment return
- Assets part of a separate account

35
Q

Life Insurance: Dividend Options

A

CRAPO/5

  • Cash
  • Reduce Premium
  • Accumulate with Interest
  • Paid up Additions
  • One-year Term/5th Dividend
36
Q

Life Insurance: Non-Forfeiture Options

A

Non-forfeiture: have cash value but don’t want to pay any more premium, but don’t want to surrender it yet.

  • Cash
  • Paid-Up Reduced Amount (reduced benefit)
  • Extended Term:
37
Q

Life Insurance: Settlement Options

A

Settlement Options: part of contract to figure out what you want to happen to the contract when you die

Remember: CPR-Post Script

  • Cash
  • Pure Life/Single Life
  • Refund
  • Period Certain
  • Specified Income/Period
  • Interest Only
  • Joint and Survivor
38
Q

What is a Modified Endowment Contract (MEC)?

A

MEC: a life insurance policy that becomes a MEC and becomes annuity-like

  • Entered into after June 21, 1988
  • Fails to meet the “7-Pay Test” (for the exam, includes ALL single premium policies)
  • Distributions/Withdrawals are taxed LIFO (Interest First)
  • Distributions under 59½ are also subject to 10% federal penalty tax (if not disabled)
  • Death Benefit is still tax-free
39
Q

What are the MEC Grandfather Life Insurance rules?

A

If old policy is not an MEC an insurance policy could become a MEC.

Once a MEC, always a MEC.

  • If death benefit increases by $150k or less and the insured has guaranteed insurability (no proof of insurability), the policy will NOT lose its grandfathered (non-MEC) status.
  • If the policy increases by ANY amount and the insured must prove insurability, the policy MAY lose its grandfathered (non MEC) status.
40
Q

Life Insurance: Transfer for Value (taxable sale)

A

If an interest in a life insurance policy is transferred for valuable consideration (not a gift), the proceeds in the excess of the consideration paid for the policy, combined with any premiums paid by the owner, are taxable as ordinary income (like a viatical).

41
Q

Life Insurance: Non-Taxable Transfer

A

No tax incurred if transfer of life insurance for

  • A sale or transfer to the INSURED (most common)
  • A sale or transfer to a partner or PARTNERSHIP in which the insured is a partner
  • A CORPORATION shareholder/officer
  • DIVORCE
42
Q

Life Insurance / Annuity 1035 Exchanges

A

Life → Life (OK)
Life → Annuity (OK)
Annuity → Annuity (OK)
Annuity → Life (NO WAY!)

43
Q

Buy Sell Agreement: Stock Redemption / Cross Purchase

A

Stock Redemption:
- Company does a stock buyback from the deceased
- No Step up in Basis, Entity is owner and beneficiary

Cross-Purchase:
- owners buy life insurance on the other owners
- Step up in Basis, Individual owner is owner and beneficiary

44
Q

Insurance: Split Dollar, Endorsement Method, Collateral Assignment Method

A

Endorsement Method:
- Employer is the owner
- Employee is not a shareowner

Collateral Assignment Method:
- Employee is owner
- Employee is a Shareholder
- Employee assigns the policy

45
Q

Annuities: Taxation

A

Periodic Payouts:
- Basis / Payout = Tax-free

Lump Sum Payouts:
- LIFO (Interest First Rule)
- Ordinary income plus 10% penalty if under 59½

Same as MEC

46
Q

Flexible Spending Accounts

A

FSA
- Deducted from Salary. Not subject to income tax, FICA or FUTA

  • Health FSA may not be used to reimburse employee premiums paid for other health plans (such as MSA, HSA and LTC)
  • No LTC expense reimbursement.

Medical FSA
- Must be used by March 15th or forfeited to the company (use it or LOSE it - Medical Only)

Dependent Care FSA
- Dependent Care must be used by 12/31

47
Q

Tax-Free Fringe Benefits

A

Fringe Benefits: Tax-Free Given to Normal Employees

  • Health Care Premiums
  • Insurance Premiums on non-discriminatory group life policy up to $50K
  • Company car for working conditions only
  • Employer-provided transit passes ($300/month cap) or parking ($300/month cap)
  • Occasional overtime meal money, cab fare, theater or sporting event tickets
  • Discounts on services limited to 20% of selling price charged to customers
48
Q

Fringe Benefits: Taxable

A

Health Insurance Premiums paid for self-employed, partners, and more than 2% owners of an S-Corp are Taxable Income.

100% is deductible as an adjustment to income on the FRONT of the 1040.

This can include all types of health insurance programs

49
Q

Insurance: First-To-Die (joint life)

A
  • written on 2 or more people
  • payable on the death of the 1st person to die
  • can be term or insurance with cash value
  • can be used in joint business ventures (buy sell agreement, etc.)
  • this joint insurance is cheaper than writing multiple single term policies
  • policy ends when the first person dies
  • helps to cover joint (mortgage, etc.) debts if one person dies
50
Q

Insurance: Limited-Pay

A

Limited pay life insurance when policy owner wants to pay for a limited number of years, not until death.

Limited pay is not appropriate for someone with limited life expectancy.

Someone with a limited life expectancy probably overpays for coverage by paying more than required to keep the policy in force.

51
Q

Insurance: Policy of Reinstatement

A

If policy lapses, can sign a policy of reinstatement, pay late premiums and keep coverage and premium amounts of the original policy.

52
Q

Exam: Insurance to Annuity 1035 Exchange

A

If want to end an insurance policy and don’t need death benefits, can do a 1035 exchange to an annuity to receive income payments.

The 1035 exchange will be tax free

Basis in the insurance carries over to the new annuity

53
Q

Insurance: Conversion

A

Can only convert term to permanent
- e.g. term insurance ends at 65, so convert to permanent insurance (whole life) before the term policy ends at 65

If Group Plan insurance, an only convert to similar plan (non-cancellable, guaranteed renewal) and generally whole life to whole life.
- can’t convert a group plan term policy to an annuity

54
Q

Group Life Insurance

A

Employer can deduct all group life insurance premiums even if discriminatory

Conversions: can only convert to similar plan (while life, etc), can’t convert to term, or annuity, etc.

COBRA: benefits must be the same as the group plan, can charge an extra 2%

If non-discriminatory, all employees get the same group life insurance benefits, all employees get to deduct the premiums on the first $50,000 in benefits

Discriminatory Group Life Insurance Plan
- key employees need to pay income tax on the difference between the Table 1 rate and their discounted rate that they contribute at, on all group life insurance benefits.
- non-key employees can deduct premiums for the first $50,000 in benefits but key employees cannot

55
Q

Group Disability Plan

A

If the employee pays the premiums, they get benefits tax free

If employer pays the benefits, they get the benefits, pass to the employee and the employee needs to pay taxes on it.

56
Q

Group Health Insurance

A

Eligibility: normally requires employees to work 32hrs/week

CFP Exam (9 decks)

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