Insurance

Question 1

A company can neither purchase nor own a life insurance policy to fund a cross-purchase buy/sell agreement because the company has ___________________ in the cross-purchase buy/sell agreement.

Answer 1

no insurable interest

A cross-purchase buy/sell agreement is between individual owners/partners/shareholders to buy another’s interest upon death, disability, or retirement.

LR Ins I-2

Question 2

How do I find out how much life insurance someone should have using the capital retention calculation?

If he dies, John wants his wife to have a yearly income of $36,000 that will increase with the inflation rate of 4%. He realizes a net investment return of 7%. How much insurance should he purchase?

Answer 2

• 7%-4% = 3%
• $36,000/.03 = $1,200,000
• $1,200,000 + money for year 1 $36,000 = $1,236,000

LR I-7

Question 3

What is the highest A.M. Best rating?

Answer 3

A++

Only A.M. Best provides detailed, historical data on insurance carriers. S&P, Moody’s, D&P provide ratings.

Question 4

When is a life insurance policy in force?

Answer 4

When the policy is delivered, and the premium is collected.

If the premium accompanies the application, a conditional receipt makes the policy effective as of the date of application, provided the applicant is found to be insurable.

LR I-7

Question 5

Name the perils covered on basic form of homeowners insurance.

Answer 5

• Windstorm
• Hail
• Aircraft
• Riot
• Vandalism
• Vehicles
• Explosion
• Smoke
• Fire
• Lightning
• Theft

LR I-9

Question 6

Name the perils covered on the broad form of homeowners insurance.

Answer 6

Those on the basic form (WHARVVES FLT) plus
Rupture of a system
Artificially generated electricity
Falling objects
Freezing of plumbing

WHARVVES FLT RAFF

Question 7

Name the 8 general exclusions that apply to all of the homeowners forms

Answer 7

• Flood
• Intentional loss
• Neglect
• Earthquake (movement
• Law
• Power failure
• Nuclear
• War

FINE. Loki pushed warring nerds.

Question 8

Does HO-6 (Condos) ever provide Coverage A?

Answer 8

Yes, on a named-peril basis (like a hurricane).

Question 9

Which sections of a personal auto policy are most important to wealthy clients?

Answer 9

The liability sections
A - Liability
C - Uninsured motorist

Question 10

Which sections of the personal auto policy would be most important to someone who is unemployed?

Answer 10

B - Medical payments
D - Damage to your auto

because may not can afford healthcare or auto repair b/c unemployed

Question 11

If the policy owner fails to maintain the required underlying coverage with an umbrella liability insurance policy, what amount of benefit will the umbrella liability policy pay?

Answer 11

The insurer will pay only the amount it wouldhave been required to pay had the underlying policies provided the appropriate limits.

e.g. Policy owner should’ve had $300k underlying coverage but only had $100k. $1MM Umbrella policy will only pay out $700,000. Policy owner will be responsible for gap of $200k between underlying coverage and umbrella coverage.

PS Ins 3-17

Question 12

For COBRA, each part-time employee counts as a fraction of a full-time employee. How is the fraction determined?

Answer 12

The fraction of an employee is the number of hours the part-time employee works divided by the number of hours an employee must work to be considered full-time.

Question 13

What determines whether or not a company is required to offer COBRA coverage?

Answer 13

The number of employees - not the number of employees covered under the company’s health plan.

Question 14

A company is required to offer COBRA. An employee who is not participating the company’s health plan quits. Must that employee be offered COBRA?

Answer 14

NO. The first requirement is that the employee is participating in the health insurance plan. If he is not participating, he cannot elect COBRA.

Question 15

Does COBRA cover group dental and vision?

Answer 15

YES

Group disability - NO

Question 16

Once an individual is enrolled in Medicare Part A & B, can they contribute to an HSA?

Answer 16

NO

Question 17

Are insurance premiums qualified medical expenses for HSAs?

Answer 17

Only certain ones - like COBRA and qualified LTC insurance

LR I-21

Question 18

Is a guaranteed renewable disability policy generally less expensive or more expensive than a non-cancellable policy?

Answer 18

generally less expensive because insurer may increase premiums later.

Question 19

If the employer pays disability premium under a salary continuation plan, premiums are _____________ to the employer and benefits are ____________ to the employee.

Answer 19

deductible / taxable

Question 20

Assume S-corp owners pay tax on premium dollars. Thus, disability benefits are received ________.

Answer 20

tax free

Question 21

Transfer for value (sale of a life insurance policy) causes benefits in excess of basis to be subject to ____________.

Answer 21

ordinary income tax

Question 22

Partnership owns a life insurance policy and sells it to a partner (transfer for value). Are the proceeds in excess of consideration paid for the policy plus any premiums paid by the owner taxable as ordinary income?

Answer 22

No. A transfer to a partner is an exception to the transfer for value rule.

I - Insured
“C” - Corporation
Dead - Divorce
People - Partner or Partnership

Question 23

If annuity is purchased and then surrendered before age 59 1/2, amount exceeding basis is subject to ______________.

Answer 23

ordinary income tax and 10% penalty

Question 24

Company provides non qualified deferred comp plan for employee. Company purchases and owns variable annuity. Annuity accrues gain. Is gain tax deferred?

Answer 24

No. Income on the contract must be treated as ordinary income received. Basis of the contract increases by the gain.

Question 25

Company provides non qualified deferred comp plan for employee. Company purchases and owns variable annuity. Annuity suffers loss. Is the loss limited to $3000?

Answer 25

No. It’s an ordinary loss. Basis of contract is adjusted down by loss amount.

Question 26

Group life insurance. Key employee provided with discriminatory excess group life plan of $200,000. How much income reported for group life insurance for full year of coverage? $0.29 per $1,000 per month

Answer 26

0.29 x 200 x 12 = $696. 1st $50,000 of coverage exemption lost because plan is discriminatory.

Question 27

IRS treats >2% owners as __________ rather than ____________ for fringe benefit premiums.

Answer 27

owners / employees

Question 28

True or False:
Loyalty, accuracy, full disclosure, and honesty are all obligations of an agent to the principal.

Answer 28

True.

Question 29

Death proceeds from a MEC life insurance policy are generally not subject to _______.

Answer 29

Income tax

Question 30

Medicare long term care is limited to a maximum of ______ days total.
It pays all of the first _______ days of skilled care and everything over a specified amount ($200) per day for the next ____ days of skilled care.

Answer 30

100 / 20 / 80

Question 31

Company borrows cash value of whole life policies it owns on key employees. Is interest on the loans an eligible business deduction?

Answer 31

Yes, but limited to a $50k loan on each policy.

Question 32

What is probably the most important advantage of a company installing a group disability plan rather than a series of individual policies for the employees?

Answer 32

Lower costs.

Question 33

Employee elects a salary reduction of $3050 to her medical expenses FSA account. True or False: If the plan has a grace period and the employee fails to use all of the salary deduction by year end, the remaining dollars are forfeited.

Answer 33

FALSE. There is a grace period. EE has until March 15th of following year to spend the money for medical expenses. The medical expense is limited to $3050 in 2023.

Question 34

Flexible spending accounts (Section 125) are funded solely by the _____ and are not tax deductible by the ________.

Answer 34

Employee / employer

Question 35

True or False: Preferred stock and bonds have fixed maturity dates.

Answer 35

False. Preferred stock may or may not have a maturity date. Bonds have a fixed maturity date.

Question 36

A key employee in a discriminatory group insurance plan must include the ______ of the actual cost or the Table 1 cost when determining their economic benefit (income).

Answer 36

Higher.

The key employee may also not exclude the cost of the first $50,000 in coverage.

Question 37

A non-key employee in a discriminatory plan ______ exclude the premium that is attributable to the first $50k of coverage in a group-term life insurance.

Answer 37

MAY.