Insurance

Question 1

Types of Risk (4)

Answer 1

1) Pure Risk: chance of loss or no loss
2) Speculative Risk: chance of profit, loss, or no loss; generally voluntary risk & undertaken by entrepreneurs
3) Subjective Risk: differs based on individual’s perception of risk
4) Objective Risk: measurable, quantifiable risk - doesn’t depend on perception; measures variation from expected loss to actual loss

Question 2

4 Methods of Treating Risk

Answer 2

1) Risk Reduction
2) Risk Transfer
3) Risk Avoidance
4) Risk Sharing

Question 3

Probability vs Severity of Risk

Answer 3

• Probability: chance of loss occurring
• Severity: Actual dollar amount of loss; more important than the probability of loss

Question 4

Law of Large Numbers

Answer 4

When more units are exposed to a similar loss, the predictability of such a loss to the entire pool increases; the more exposures, the more likely results will equal true results & be predictive of future results; helps reduce objective risk

Question 5

Causes of Insured Loss

Answer 5

1) Perils: actual causes of a loss (ex. hurricane)
2) Hazards: conditions that increase the likelihood of a loss occurring (3 - Moral, Morale, & Physical)
3) Adverse Selection: tendency of persons with higher-than-average risk to purchase or renew insurance; managed through underwriting, denying insurance on the front end, and raising premiums on the end back end

Question 6

3 Types of Hazards

Answer 6

1) Moral: character flaws
2) Morale: indifference created because a person is insured
3) Physical: tangible condition that increases probably of perils occurring

Question 7

Insurable Risks are CHAD

Answer 7

• Catastrophic
• Homogeneous exposure units
• Accidental
• Determinable (measurable)

Question 8

Legal Contracts require COALL

Answer 8

• Competent parties
• Offer & Acceptance
• Legal consideration
• Lawful purpose

Question 9

Principle of Indemnity

Answer 9

Insured is only entitled to compensation to the extent of insured’s financial loss; cannot make profit from contract

Question 10

Subrogation Clause

Answer 10

Insurer cannot receive compensation from both insurer & third party for the same claim.

Question 11

Adhesion Insurance Contract

Answer 11

“take it or leave it” policy. Ambiguities found in favor of the insured

Question 12

Aleatory Insurance Contracts

Answer 12

Money exchanged may be unequal (small premium but large benefit)

Question 13

Unilateral Insurance Contracts

Answer 13

• One way promise made by the insurer to pay in event of loss. The insured is not obligated to pay premiums. Simply, if no premium is paid, then no promise by the insurer

Question 14

Conditional Insurance Contracts

Answer 14

Insured must abide by certain terms. If terms not met, then insurer not obligated to pay claim.

Question 15

Recission

Answer 15

Deems a contract void from inception

Question 16

Types of Agents (3)

Answer 16

1) General Agent: represents one insurer (ex. State Farm)
2) Independent Agent: represents multiple, unrelated insurers
3) Broker: actually represents the policy owner, not the insurance company

Question 17

Types of Authority

Answer 17

1) Express Authority: directly given through agency
2) Implied Authority: authority the public perceives and stems from Express Authority where valid agreement exists . Insurer is responsible.
3) Apparent Authority: When insured believes agent has authority when in fact, no authority exists. The insurer is still responsible.

Question 18

Riders & Endorsements

Answer 18

Written additions to an insurance contract

Question 19

Insurance Agency Ratings

Answer 19

• A.M. Best’s: Highest A++ to A/A-
• Moody’s: Highest: Aaa to Aa1
• Standard and Poors: Highest: AAA to BBB

Question 20

NAIC (National Association of Insurance Companies)

Answer 20

• NAIC: provides watch list of insurance companies based on their financial ratio analysis
• NAIC has no regulatory power over the insurance industry. Regulation HAS to occur at the STATE level

Question 21

DIE-DIE (6 Steps in Risk Mgmt)

Answer 21

1) Determine objectives
2) Identify risks
3) Evaluate risks
4) Determine alternatives
5) Implement program
6) Evaluate

Question 22

4 Types of Life Insurance

Answer 22

1) Term Life
2) Whole Life
3) Universal Life/Variable Universal Life
4) Group Life

Question 23

Term Life Insurance

Answer 23

The basics:
- The policy pays a predetermined sum if the insured dies during term. Can be renewed. Used for temporary needs.
- No cash value or savings component
- Most term policies have provision to be converted into whole life

Most suitable for:
- Very inexpensive at young ages. Good for young people!
- Premiums increase exponentially for older ages. Also, term may not meet permanent insurance needs

3 Types of Term Policies:
1) ART - Annual Renewable Term: premiums increase annually. Death benefit is fixed at Face Value of policy.
2) Level Term: premiums are level throughout term (insured is essentially prepaying some of the later, more expensive premiums earlier in the policy). Death benefit is fixed at Face Value of policy.
3) Decreasing Term: Premiums are level. Death benefit DECREASES over term of policy. *Typically used to pay mortgage

Question 24

Whole/Permanent Life Insurance

Answer 24

The basics:
- provides lifetime protection until age 120.
- Premiums usually expensive. They vary widely - from being level to fixed for a term.
- Have a savings component. The cash can be used for loans or if policy surrendered. Earnings grow tax-deferred.

3 Types of Whole Life Insurance Policies:
1) Ordinary Life: pays premium until 120yrs or death. Death benefit is level throughout all of policy.
2) Limited Pay Life: higher premiums but insured only pays until certain age
3) Variable Life: Cash value is invested. Opportunity for higher returns. Death benefit & Cash value are dependent on performance.

Whole Life Dividend Options - Participating vs Non-participating:
- Nonparticipating: whole life policy will NOT pay dividends
- Participating: Will pay dividends.
Exam Tip:
The 5 Dividend Options are CRAP-O:
C: Cash
R: Reduce Premiums
A: Accumulate at Interest: insurer invests dividends and are tax-free up to client’s basis.
P: Paid-up Additions: insurer purchases additional insurance each year for insured
O: One-year Term: insurer adds term insurance each year to the policy face amount equal to the cash value of the policy. *Known as the 5th Dividend option on the CFP Exam!

Settlement Options:
- Lump Sum
- Interest Only: periodic payments of interest on policy proceeds
- Annuity Payments:
1) Fixed Amount
2) Life Income: converts death benefit into an annuity contract for life for the beneficiary.
3) Fixed Period: can purchase an annuity certain which makes payments in certain # of years. Can be preferential if need more cash at particular time or can foresee shorter life expectancy
4) Life Income with Period Certain: transforms the death benefit into a life annuity contract based on age & health of beneficiary
5) Joint & Survivor Income: payments are made over lives of two people.

3 Non-Forfeiture Options:
1) Cash Surrender Value: accumulated cash value less surrender charges
2) Reduced Paid-up Insurance: receives cash value in form of paid-up policy with smaller face amount
3) Extended Term Insurance: cash value in form of paid-up term policy with the same face amount as original policy

Accelerated Death Benefits:
- if terminally ill - 24 months or less - then can take.
- either lump sum or monthly income.
- payments deducted from policy face value. Proceeds will be tax-free!

Question 25

Universal Life Insurance

Answer 25

The basics:
- Insured may adjust premiums, face value, and cash value of policy.
- Insured does not direct the investment portion.
- Cash Value can be used to pay premiums
- KEY WORDS: Unbundled & flexible (premiums)

Types of Universal Life:
- Universal Life A (Option 1): premium is flexible, adjustable death benefit. If the cash value is high enough, then death benefit will increase.
- Universal Life B (Option 2): more expensive than A. Same features as A EXCEPT the death benefits vary directly with the cash values.
- Variable Universal Life: has investment option; no min guarantee on returns; riskier

Question 26

Life Insurance Policy Provisions

Answer 26

• Grace Period: 31-61 days after premium due date in which policy remains in force. Death benefit still paid if die during this period
• Misstatement of Age (younger & women pay less) will not void contract. The death benefit is reduced by premiums of actual age.
• Suicide: no death benefit is committed within 2yrs of purchasing policy.
• Waive Premiums for disability: Whole Life waives entire premium. Universal & Variable Universal will either waive entire premium OR charges related to mortality & admin

Question 27

Group Life Insurance

Answer 27

Group Term Insurance:
- Most common insurance offered from employers
- Coverage based upon salary (not length of service nor job classification)
- Payout usually in Lump Sum
- Premiums for first $50,000 of coverage is tax free to employee. Premiums paid are with after-tax dollars
- Premiums are tax deductible for employer.

Group Whole Life Insurance:
- Allows employees to accumulate savings for retirement through cash value of policy.
- Any premiums paid by employer are taxable income to employee.

Question 28

Life Annuity Contracts

Answer 28

The basics:
- periodic payments for fixed period or duration of life
- protection against outliving assets; used to fund retirement
- NOT used to leave assets to heirs

Types of Annuities:
- Fixed Annuity: premiums accumulate at fixed interest rate over period of time. Provides greater security over Variable Annuity.
- Equity Indexed Annuity: form of Fixed Annuity
- linked to an index
- 1-10yrs, limits downside, and offers modest upside
- Variable Annuity: may invest in stocks. No guarantee of return. Keeps pace with inflation. Risker but higher reward.

Question 29

Timing of Annuity Payments

Answer 29

• Pure Life Annuity: payments made over lifetime and stop at death. There is NO guarantee min payment, although, received are higher. Risk - receive one payment & die.
• Life Annuity w/Guaranteed Min Pay: payments continue for min term. Payments are less but have guarantee of min.
• Installment Refund Annuity:
• Joint & Survivor Annuity: paid out over lifetime of both annuitants.

Question 30

Tax of Life Insurance

Answer 30

• Generally, Death Benefit is excludable from taxable income to extent proceeds don’t exceed basis (EXCEPT for Transfer for Value Rule)
• Dividends: considered a return of basis and not taxable UNLESS they exceed premiums. If so, not taxable until withdrawal.
• Withdrawals: considered a return of basis until premiums are distributed. After that, it is taxable.
• Cash Value: not taxable until withdrawal
• Loans against Life Ins: tax free (EXCEPT if a MEC)
• Exchanges: ONLY from Annuity to Life Insurance is taxable event
• Premiums: NOT deductible for insured. However, they ARE deductible for insurer of group life.

Question 31

MEC’s (Modified Endowment Contracts)

Answer 31

MEC if fails 7 Pay Test: Fail if premiums paid exceed premiums due for the time period being considered.
*KEY: MEC status only affects loans/withdrawals. If not intending to take a withdrawal, then creating MEC is no issue. Death benefit is treated similarly to that of regular life insurance policy.

If deemed a MEC:
- Subject to 10% penalty if withdrawn before age 59.5
- Loans taxed on LIFO basis.
(Essentially, life insurance policies are abused by premiums being front-loaded & paid-in-full in first few years. This is the case with MEC’s. So, they lose the benefits associated with life insurance when comes to borrowing money from policy. Hence, withdrawals/loans are taxed on LIFO basis where Earnings are taken out first & only then the Premiums. Whereas with traditional Life Insurance, withdrawals/loans can be taken first from the Premiums, and then only taxed on the Earnings).

Question 32

Transfer for Value Rule

Answer 32

Rule: death benefit of life insurance is taxable to the transferee to the extent proceeds exceed basis. BASICALLY: death benefit is excluded from tax to extent of basis. Beyond that, it is taxable income.

Exceptions to the Transfer for Value Rule:
- Transferred to insured
- Transferred to business partner/business in which you are partner or shareholder
-Transferred while being terminally or chronically ill
- Transfer that results in a Carryover Basis (when transferor basis > consideration received):
(ex. Kate sells her son a $100,000 policy on her life for $1,000. At the time of the sale, the policy had a gift tax value of $4,000 and the mother had paid net premiums of $5,000.
This represents a “part gift part sale.” There has been a gift of $3,000 ($4,000 value of the policy less $1,000 paid by the son), and a sale for $1,000 of a policy worth $4,000. In this example, the transaction will be within the “carryover basis” exception of the transfer-for-value rule, because Kate’s $5,000 basis was greater than the $1,000 she received (so there was no gain or adjustment to her basis by the son), and the gift value is greater than the consideration. Where the transferor’s basis is GREATER than the consideration received, the transferee carries over the transferor’s basis. Here, the son’s basis (for purposes of determining gain or loss on subsequent policy transactions) will be the basis he can carry over from that of his mother’s, i.e., $5,000)

Question 33

Tax of Life Insurance for Installment Options

Answer 33

(Pg. 165)

Essentially, any payments beyond recovery of basis are taxable. If basis is not recovered before death, then it is deductible on final tax return.

Use Exclusion Ratio to calculate how much of annuity payment should be excluded from income:
Step 1: Basis in Policy/Total Expected Payment = % to be excluded from gross income (the Exclusion Ratio)
Step 2: Exclusion Ratio x monthly annuity payment = return of basis excluded from gross income

Question 34

Tax of Viatical Settlements & Accelerated Benefits

Answer 34

• Chronically Ill: unable to perform at least two Activities of Daily Living (ADL) for at least 90 Days.
• Terminally Ill: expected death within 24 months
• Viatical Settlements: owner surrenders life insurance policy in return for payment smaller than death benefit. Payment is excluded from recipient’s gross income. Viatical settlement company has taxable income to extent proceeds exceed amount paid for policy

Question 35

Taxation of Annuities

Answer 35

• For withdrawals prior to the start of annuity (pre-mature withdrawals):
  FIFO method used for annuities prior to 1982.
  LIFO method used for annuities after 1982
• Only the exchange from Annuity to Life Insurance is taxable event

Question 36

Medical Insurance

Answer 36

4 Major Divisions: (HSPM)
1) Hospital Expense: expenses associated with hospitalization (not physician fees)
2) Surgical Expense: surgeon fees
3) Physician’s Expense: all nonsurgical physician expenses
4) Major Medical: covers hospitalization, physician & surgeon fees, PT, and prescription drugs (NOT eye and dental). Usually 80/20 Coinsurance

Question 37

PPACA (Patient Protection and Affordable Care Act)

Answer 37

• requires most US citizens to have health insurance
• Employer Requirements: employers with 50 or more FT employees that do not have coverage, charged fee of $2,000 per FT employee excluding first 30 employees.
• Creates 4 Benefit Categories:
  Bronze: min allowable coverage, 60% coverage of cost of plan
  Silver: covers 70%
  Gold: covers 80%
  Platinum: covers 90%

Question 38

HMO’s (Health Maintenance Organizations)

Answer 38

• Delivers health care in return for periodic premiums
• Managed by a primary care physician (gatekeeper) who determines what care is received.
• Primary disadvantage: no coverage outside of HMO

3 Structural Models:
1) Staff Models: HMO is a corporation. Medical staff members are employees of HMO.
2) Group Model (Network Model): HMO contracts with groups of medical providers to care for insured plan subscribers
3) Individual Practice Association: HMO is made up of physicians who have their own office locations, but contract out to the HMO

Question 39

HSA (Health Savings Account)

Answer 39

• Distributions for qualifying medical expenses are tax-free.
• Distributions for non-qualifying med exp subject to tax until age 65 (not like 59.5 like IRA). 20% penalty.
• Contributions are deductible for: contributing employee, contributing employer, and any eligible family member who receives contributions on their behalf.
  
  • Max out of pocket = $7,500 single ($15,000 family)
  • Deductible = $1,500 single ($3,000 family)
  • Contributions = $3,850 ($7,750 family)
  • Catch-up Contribution = $1,000 for age 55+* (not IRA 50)
• To be Eligible: MUST have a HDHP (high deductible health plan); cannot participate in Medicare; cannot be claimed as dependent on other return

Question 40

Health Insurance Provisions

Answer 40

• Noncancellable Policies: right to renew until specified age/time. Insurer cannot cancel policy nor can raise premiums
• Guaranteed Renewable Policy: right to renew until specified age/time. Insurer cannot cancel policy BUT can raise premiums
  *All policies are now required to be Guarantee Renewable

Question 41

HIPAA

Answer 41

Protects workers ability to obtain health insurance when changing jobs, laid off, or retiring.

Question 42

COBRA (Consolidated Omnibus Budget Reconciliation Act)

Answer 42

An extension of group health insurance with the same coverage. An employer may charge 2% for admin costs.

To be eligible for COBRA, group coverage must terminate because:
- employee dies
- employee is terminated, voluntary or involunatry (EXCEPT if terminated for gross misconduct)
- employee separates from spouse
- hours are reduced to part-time
- employee becomes eligible for Medicare
*Only offered to employers who offer group health plan and have at least 20 employees

A Qualified beneficiary is any individual who is covered by group health who is either an employee, employee’s spouse, or dependent child. Employees have 60 days to make COBRA election

Employers must offer coverage based on any of the following events:
- 18 months for reduction in hours or normal termination
- 36 months all others
**CFP EXAM Tip: memorize 18 month event. Any others are 36 months

COBRA coverage can be terminated if:
1) employer terminates health plan because going out of business
2) employee or beneficiary fails to make premium payments
3) employee becomes covered under any other plan

Question 43

Long Term Care Options (LTC)

Answer 43

1) Medicaid: available to nation’s poor; eligibility based on assets.
Individuals entering nursing home can apply once assets are spent down.
- Penalty for assets gifted in 5yrs prior to entering nursing home

2) Medicare: available for those eligible for Social Security. Benefits are extremely restrictive. Only pays if patient is capable of realizing improvement in condition

3) Continuing Care Retirement Community:

4) Private LT Care Policy: coverage for nursing home stays and other care not covered by health insurance. Must be chronically ill or suffer significant cognitive impairment
Seven types of coverage:
a) Skilled Nursing: traditional nursing home
b) Intermediate Nursing: occasional nursing care
c) Home Health Care: in-home nursing
d) Assisted Living: apartment style living with healthcare service
e) Adult Day Care: Daily assistance while family works
f) Hospice Care: terminally ill, end of life care

Eligibility:
- Unable to perform 2 of 6 ADL’s: transferring, toileting, bathing, dressing, eating, continence
- Cognitive impairment

Question 44

Disability Income Insurance

Answer 44

Provides coverage when individual is unable to work due to illness or injury.

Definitions of Disability:
- Any Occupation: means that if you can perform duties of any type of job, you will not qualify. Least expensive premium & also least helpful form of disability insurance
- Modified Any Occupation: disabled if unable to perform gainful occupation reasonably fit by education, experience, training
- Own Occupation: disabled if cannot perform own occupation. Most expensive coverage. Ideal for highly specialized, high paying fields (ex. doctors)
- Split Definition: Begins with Own Occupation and moves into Modified Any Occupation after a year or two under Own Occupation.

Benefit Period:
- ST: 2yrs or less
- LT: until normal retirement age, death, or specified time

Tax of Benefits: Likely to be tested
If Employee pays premium with After-Tax dollars,
- Premiums are NOT deductible
- Benefits are tax free
If Employee pays with Pre-Tax dollars,
- Benefits are taxed
If Employer pays premium:
- Premiums are deductible to Employer
- Benefits to Employee are taxed

Question 45

Summary Chart of Tax on Insurance Products

Answer 45

Question 46

Testamentary Trust

Answer 46

Provides surviving spouse with access to proceeds. Gives policy owner post mortem control if places policy in the trust. Any remaining amount in the trust at death of surviving spouse will pass to children.

Question 47

Reinstatement Clause

Answer 47

During a specified period, the policy owner may reinstate a lapsed policy upon payment of past-due premiums and proof of insurability.

Question 48

Disability Insurance Amount Analysis

Answer 48

Factors considered include:
- financial needs
- existing coverage
- current levels of incomr
- emergency fund
*medical insurance coverage NOT one of them

Question 49

Homeowner’s Insurance

Answer 49

3 Basic forms of coverage:
1) Basic
2) Broad
3) Open Perils

Question 50

Basic Homeowner’s Insurance

Answer 50

Coverage for 12 named perils:
Fire
Vehicles
Lightning
Smoke
Windstorm
Vandalism
Hail
Riots
Theft
Aircraft
Volcanic Eruptions

Question 51

Broad Homeowner’s Insurance

Answer 51

Coverage for 18 named perils: (6 additional)
13. Falling objects
14. Weight of ice/snow
15. Accidental overflow of water
16. Sudden and accidental cracking, burning appliances
17. Freezing plumbing
18. Sudden and accidental damage from artificially generated electrical currents

Question 52

Open Perils Homeowner’s Insurance

Answer 52

Protects ALL perils except those specifically named in broad & basic. It is the MOST comprehensive coverage.
- Can add Endorsements for excluded perils

Generally excluded:
- movement of ground (earthquake, volcanic eruptions, mud/landslide, sink hole)
- Ordinance or law regulating the construction, repair of buildings
- Damage from rising water (floods. waves)
- War
- Nuclear hazard
- Intentional or neglectful acts
***Sudden & accidental are covered losses. Intentional & neglectful are NOT covered perils

Question 53

Endorsements

Answer 53

Additional coverage for perils specifically excluded such as:
- Sink hole collapse
- Earthquake
- Sewage backup
- Refrigerated property coverage
- flood insurance from National Flood Insurance Program

Question 54

Property Insurance

Answer 54

Section I Coverage:
- Coverage A: Dwelling
- Coverage B: Other Structures
- Coverage C: Personal Property
- Coverage D: Loss of Use

Section II Coverage:
- Coverage E: Personal Liability
- Coverage F: Medical Payments to Others

Question 55

Section I Coverage

Answer 55

Coverage A - Dwelling: typically coinsurance requirement is for insured to carry 80% replacement cost. Losses paid on Replacement Cost Basis. If don’t have, then payment for partial losses is calculated as follows:
(Amount of Ins carried/Coinsurance Requ) x Amt. of Loss -OR-
“Insurance I have, divided by Insurance I should have (80% of the replacement cost), times the loss, minus the deductible = insurance amount”

Coverage B - Other Structures: detached structures on property (Ex. detached garage, greenhouse, storage building). Typical coverage limit of 10% of Coverage A. Losses paid on Replacement Cost Basis.
*Other Structures used for business purposes are NOT covered under homeowner’s policy. Separate coverage must be purchased.

Coverage C - Personal Property: tangible moveable property. Typical coverage limit 50% of Coverage A. Losses paid on Actual Cash Value basis (rather than on a Replacement Cost Basis).

Coverage D - Loss of Use: Additional living expenses incurred when insured is unable to occupy the dwelling due to damages caused by peril. Also includes lost rental income. Typical coverage limit 30% of Coverage A.

Question 56

Section II Coverage

Answer 56

Coverage E - Personal Liability: covers claims, legal defense, and settlements associated with bodily injury & property damage to others when insured/insured’s family is responsible. Typically $100,000 per occurrence.

Coverage F - Medical Payments to Others: covers all necessary medical expenses without regard to liability for others arising out of the insured’s activities, premises, or animals. Medical Exp must be incurred within 3yrs of accident.

General Exclusions from E & F Coverage:
- intended or expected by the insured
- business related
- resulting from rental property of the premises
- arising from use of watercraft, motorized vehicles, or aircraft

Question 57

Automobile Insurance

Answer 57

PAP’s - Personal Auto Policy: sold in most states & covers the following:
- Part A: liability coverage
- Part B: medical payments coverage
- Part C: uninsured motorist coverage
- Part D: coverage for damage to the insured’s automobile
- Part E: duties after an accident or loss
- Part F: general provisions
*Low Speed Vehicles (LSV’s) are NOT covered. A rider may be purchased separately to cover.

Question 58

Automobile Insurance - Parts Coverage

Answer 58

Part A - Liability Coverage (Bodily Injury & Property Damage):
Covers bodily injury or property damage to others when insured is responsible.
Part B - Medical Payments Coverage:
Covers medical expenses sustained in an accident regardless of who is responsible. Two groups of insured persons:
1) The insured & his family members: coverage if driving, passenger, or struck by an automobile
2) Other persons in vehicle: coverage if passenger in insured’s automobile
Part C - Uninsured Motorist Coverage (UM or UIM coverage):
Covers the insured for property damage or bodily injury when the underinsured or uninsured motorist is at fault.
Part D - Coverage for Damage to Insured’s Automobile:
Two facts - Collision & Comprehensive
1) Collision: covers damages to insured automobile either from accident with another vehicle, single-car accident (ex. car rolling over on ice), or damage from an object (ex. fence, tree, garage door).
2) Comprehensive: covers exps. if vehicle stolen, damage in incident that is not collision, and damage from perils (ex. fire, vandalism, theft, weather-related, running into animals, riots). Essentially, “Other than Collision coverage”
Part E - Duties After An Accident or Loss:
1) Give notice immediately to insurance
2) Protect auto from further loss
3) File written proof
Part F - General Provisions:
Covers in US & Canada but NOT Mexico.

Split-Limit Liability Coverage: per person, per accident amounts of coverage

Question 59

3 Categories of Legal Liabilities

Answer 59

1) Torts (civil wrongs)
2) Breach of contract
3) Criminal offenses
*Liability Insurance covers certain types of torts but not breaches or criminal offenses

Question 60

Types of Torts

Answer 60

1) Intentional Interference: intentional act committed against another that causes injury. Generally NOT covered HOWEVER both:
- Slander: defamation or harm by verbal statement
- Libel: defamation caused by written statement
are covered under personal liability insurance

2) Strict & Absolute Liability: occurs as result of legislation in which one party is held liable regardless of who is responsible for injury.
- Strict Liability: responsible parties have few defenses
- Absolute Liability: responsible party has no defense

3) Negligence: courts use “prudent man standard” to judge if act with appropriate care.

Other Relevant Terms:
- Res ipsa loquitor: “The act speaks for itself” doctrine of the law of negligence that permits use of reasonable evidence when a specific explanation of negligence is not available (ex. an airplane crashing implies negligence)
- Negligence per se: The act itself constitutes negligence
- Burden of Proof: Borne by injured party

Damages from a Tort: can either be Bodily Injury or Property Damage. There are 3 Damages for Bodily Injury:
1) Special Damage: measurable losses (ex. loss of limbs)
2) General Damage: intangible losses (ex. suffering & pain)
3) Punitive Damage: amounts assessed against negligent party as punishment for act

Defenses to Negligence:
1) Assumption of Risk: fully knew danger & voluntarily chose to proceed
2) Negligence on Injured Party:
3) Last Clear Chance Rule: claimant who is endangered by his own negligence may recover if defendant had a “last clear chance” to avoid injury

Question 61

Personal Liability Insurance

Answer 61

PLUP - Personal Liability Umbrella Insurance: additional protection on top of HO & Auto Policy. Typically $1Million or more.
- Two factors for determining amount: Earning power & Net Worth
Exam tip: client without or too low of a PLUP has a deficiency in their plan

CLUP - Commercial Liability Umbrella Policy: for businesses

Question 62

Homeowners Forms

Answer 62

1) HO-1: almost non-existent basic coverage
2) HO-2:
3) HO-3: special form coverage with open peril on coverage A and B.
*earthquakes excluded
4) HO-4: renters belongings coverage
5) HO-5: comprehensive coverage
6) HO-6: condo owner coverage

Question 63

Insurance Needs Analysis

Answer 63

Periods
- Blackout Period: occurs after youngest child leaves home
- Dependency Period: under children turn 18

Approaches to Calculate Amt of Insurance:
- Needs Approach
- Human Life Approach
- Multiple of Earnings Approach
- Income Replacement Method

Question 64

Business Use Insurance

Answer 64

• Business Interruption Insurance:
  Covers indemnity for businesses during the period where they are rebuilding and restoring after covered losses have forced a halt of business as usual
• Contingent Extra Expense Insurance:
  Covers expenses caused by the occurrence of a loss to a covered peril which the insured does not own.
• Malpractice Insurance:
  Covers bodily injury
• Errors & Omissions coverage:
  CPA liability, fiduciary liability and even lawyers’ liability are specializations of Errors & Omissions coverage

Question 65

Social Security/OASDI

Answer 65

OASDI: Old Age, Survivor, and Disability Insurance

Social Security/OASDI: benefits paid from taxes collected on wages from employees and employers. 90% of US workers are covered.
- Covered: federal employees after 1984, self-employed persons, employees of nonprofit orgs, hospital interns, and farmer/agricultural workers
- NOT Covered: Federal employees before 1984, railroad employees, family employment, ministers/religious, student nurses, U age 18, students working for college or club

5 Categories of SS Benefits:
1) Retirement Benefits
2) Disability Benefits
3) Death Benefits
4) Survivors Benefits
5) Medicare

Question 66

1) Retirement Benefits

Answer 66

• Full Retirement Age:
  
  • Before 1938: 65
  • Between 1943-1954: 66
  • 1960 or After: 67
    *2 months per year for all gap years in between
• Early Retirement - Permanently Reduced Benefit:
  
  • If FRA 65, then age 62 is 80% of full benefit
  • If FRA 66, then age 62 is 75% of full benefit
  • If FRA 67, then age 62 is 70% of full benefit
    *Benefits reduced by 5/9 of 1% each month for first 3yrs.
    *Benefits reduced by 5/12 of 1% each month beyond 3yrs
• Delayed SSB until age 70:
  *Exam Tip: just know benefits may increase 8% each year delayed
• Retirement Eligibility:
  
  • Must be “fully insured” aka 40 Quarters of Coverage
  • Quarters of Coverage: based on dollar amount of earnings
  • 1 Quarter = $1,640 in wages
• Beneficiaries:
  
  • disabled under age 65
  • retired workers age 62 or older
  • spouse of retired or disabled who is at least 62 OR is caring for a
    child U16yr or disabled
  • divorced spouse of retired or disabled worker if ex-spouse is age 62
    AND was married for at least 10yrs AND did not remarry by age 60
• Benefits Temporarily Reduced if Earn Too Much:
  
  • Early Retirement: reduced by $1 for every $2 above threshold
    Threshold: ($21,240)
  • Full Retirement Age: reduced by $1 for every $3 above threshold
    Threshold: ($56,250)
• Taxation of Social Security Benefits:
  
  • Based on Combined Income up to 85%
  • Combined Income includes: AGI, nontax interest, 1/2 retirement
    benefits, and foreign earned income

Question 67

2) Disability Benefits

Answer 67

Definition: severe physical or mental impairment for 5 months, expected to prevent worker from performing substantial work for at least 1yr or result in death.
- Benefits begin in 6th month following 5 month waiting period

Eligibility:
- Age 31 or greater; fully insured (40Q); and earned 20Q in the last 40Q
- Btwn age 24-30: worker earned 1/2 of quarters available since 21yr
- Btwn age 21-24: worker earned 6Q in the last 12Q

Question 68

3) Death

Question 69

4) Survivorship Eligibility

Answer 69

• Must be fully insured (40Q) OR currently insured (6Q of coverage in the last 13 Qs)
• Children U18 & U19 if in secondary school (always covered)
• Caretakers of children U16 (always covered)

Question 70

5) Medicare

Answer 70

Definition: federal health insurance for persons 65 & older

Parts of Medicare:
I. Medicare Part A:
- Coverage for Hospital insurance (Hospice, inpatient hospital care, skilled nursing facilites, etc.)
- Benefit periods: begins on the first day insured is in hospital and ends 60 days of no further skilled care
- Deductible $1,600 per benefit period
II. Medicare Part B:
- Coverage for doctors visits, lab tests, ambulance, outpatient therapy, medical equipment (Ex. wheelchairs), etc.
- *Automatically enrolled in Part B unless Opt OUT
- Does NOT cover: NEED TO KNOW
1) Dental care
2) Eye Exams
3) Hearing Aids
4) Cosmetic surgery
III. Medicare Part C:
- Must own and pay for Parts A & B
- Coverage for Vision, Dental, Hearing. Coverage is regional
IV. Medicare Part D:
- Coverage for prescription drugs

Applying for Medicare:
- If receiving Social Security at 65, then automatically enrolled in Medicare
- If not receiving Social Security, then must enroll

Medicare Advantage:
acts like an HMO (Health Maintenance Org) covering vision, dental, and hearing