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Clark's Cards > Insurance > Flashcards

Insurance Flashcards

1
Q

Tort

A

Crime or wrongful act
Intentional: Assault, Battery, Libel, etc.
Unintentional: Negligence or Carelessness

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2
Q

Attractive Nuisance

A

High degree of care imposed on land occupier for certain conditions.

Examples:
* Pool not fenced
* Vacant land where kids play

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3
Q

Strict Liability

A

Generally limited to manufacturers of products found to be defective.

Examples:
* Lettuce with e. coli
* Pharmaceuticals causing illness
* Autos with defects

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4
Q

Absolute Liability

A

Extra-hazardous condition which results in losses to others.

Examples:
* Keeping wild animals
* Blasting
* Workers Comp

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5
Q

Vicarious Liability
(Respondeat Superior)

A

One person liable for negligence of another.

Example: Branch manager responsible for reps.

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6
Q

Assumption of Risk

A

One party recognizes and understands danger in an activity, yet voluntarily chooses to encounter it.

Ex: Lift tickets have assumption of risk disclosure.

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7
Q

Contributory Negligence

A

Any negligence on part of injured party defeats the claim.

Examples: Jaywalking, Drunk Driving

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8
Q

Comparative Negligence

A

Damages mitigated by the other party.

Ex: Pedestrian 20% negligent, Driver 80%.

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9
Q

Last Clear Chance

A

When the other party, immediately before, had a last clear chance to prevent but failed to do so.

Example: Road Rage

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10
Q

Adhesion

A

Contract accepted “as is” or not at all.
Not a regulated contract.

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11
Q

Aleatory Contract

A

With insurance, amount of dollars spent by the contract parties is typically unequal.

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12
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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13
Q

What is Peril?

A

The cause of a loss, the event insured against:

  • Fire
  • Windstorm
  • Theft
  • etc.
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14
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 river
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15
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)
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16
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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17
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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18
Q

What are the Parts of the Insurance Contract?

A
  • 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.
  • D-DICE
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19
Q

What are Negligences?

A
  • Attractive Nuisances: Swimming pool, vacant lot
  • Negligence per se: Violation of a statute
  • Strict Liability
  • Product Liability
  • Absolute Liability: Workers Comp
  • Vicarious Liability: Respondeat superior (principal’s liability for their agents).
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20
Q

What are Defenses?

A
  • 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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21
Q

What are two methods of Calculating Life Insurance needs?

A
  • Capital Utilization Approach: Uses annuitization to provide needed income but leaves no money at the end of the planned period.
  • Capital Needs Approach: Uses interest only, so the original capital is still left at the end of the period (also called Capital Retention or Interest Only).
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22
Q

What are the most comprehensive Insurance Rating Service/Category services?

A
  • A.M. Best: A++ to F
  • Standard & Poor: AAA to CCC
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23
Q

What are Sections of a Homeowner’s Policy and

what do they cover?

A

Section I (Coverage: A B C D)

  • 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)
* E - Liability
* F - Medical Payments

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24
Q

Nicknames to Remember
Sections of a Homeowner’s Policy

A

Section I (Coverage: A B C D)

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

Section II (Coverage: E F)
* E - Enemies (Liability)
* F - First-Aid (Medical Payments)

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25
Q

What property is excluded under Personal Property Coverage?

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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26
Q

What are the Basic Form Perils Covered?

A

The policy lists perils covered:

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

Study Hint: Remember: WHARVVES/FLT

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27
Q

What are the Broad Form Perils Covered?

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

Study Hint: Remember Basic plus RAFF

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28
Q

Homeowner’s Policy Exclusions include:

A

“OPENN WIF”

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

Note: Sinkhole is a covered peril for the exam

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29
Q

What is the formula for Replacement Cost Coverage?

A
  • Replacement Cost x Coinsurance Percentage = Insurance Required
  • Insurance Carried ÷ Insurance Required x Loss - Deductible = Amount Paid by Insurance
    *Usually Commercial 90%, Residential 80%
30
Q

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
31
Q

What are the Parts of an Auto Insurance Policy?

What do they cover?

A
  • Part A - Liability to third parties
  • Part B - Medical payments
  • Part C - Uninsured/Underinsured motorists
  • Part D - Damage to the covered auto
32
Q

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

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

  • 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 decribed herein which is out of normal use because of a breakdown, repair, servicing, loss or destruction
33
Q

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

A
  • 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)
34
Q

What is Uninsured Motorist Coverage (UM)?

A

This agreement promises to pay the amount an injured insured could have collected from the uninsured dirver 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

35
Q

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

A
  • Glass Breakage

Loss caused by:

  • Falling Objects
  • Fire
  • Theft
  • Explosion
  • Earthquake
  • Windstorm
  • Hail
  • Water
  • Flood
  • Riot or Civil Commotion
  • Contact with Birds or Animals
36
Q

What are the benefits of an Umbrella Liability Insurance?

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!
37
Q

What are the two types Professional Liaiblity 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)
38
Q

What does Worker’s Compensation cover?

A
  • Unlimited Medical Expenses
  • Disability Income (TAX FREE)
  • Death Benefits
  • Rehabilitation (Medical and Vocational)
  • Absolute Liability
39
Q

Medicare does NOT cover…

A
  • Routine foot care, glasses, hearing aids, and dental
  • Emergency Care outside the US (some exceptions for Canada, Mexico and Caribbean)
40
Q

Explain the limitations of Medicare’s Long Term Care coverage.

A

Benefits are Limited: Pays all of the first 20 days of SKILLED care and everything over $200/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
41
Q

Compare HMO vs PPO

A

HMO:

  • Provider paid monthly fee regardless of services rendered (Capitation)
  • Out of Network care not covered at all

PPO:

  • Provider paid for actual services rendered
  • Out of network partially covered, usually 70%
42
Q

What are the COBRA coverage requirements and

Qualifying Events?

A
  • Must have 20 Full/Part-Time Employees.
  • The option to buy Continuation.

Coverage must be offered to: (Qualifying Event?)

  • Terminated employees/dependents up to 18 mo.
  • Voluntary or involuntary termination, change from FT to PT
  • Spouses and other dependents up to 36 mo.
  • Employee’s death, divorce, legal separation, or eligibility for Medicare Children of Employees up to 36 mo.
  • Loss of dependent status (marriage)
  • Reaching dependency age limit specified by plan
43
Q

What is a Health Savings Account (HSA) and

what are its benefits?

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
44
Q

What are the Definitions of Disability?

A

Own Occupation - Best definition for the insured

  • Modified any occupation

Split Definition - Own then modified

Any Occupation (Social Security definition)

  • Loss of Income
45
Q

What are the Policy Continuation Provisions for Disability Income?

A
  • 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
46
Q

Taxation of Premiums and Benefits for Disability Policies

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 owns the contract and the employer pays the entire premium under a salary continuation plan (group plan).

  • Premiums are deductible by the employer
  • Benefits are taxable to the employee
47
Q

Permanent Life Insurance
(Low Risk Tolerance)

A
  • Insurance company controls the investment return
  • Assets part of the general account
  • Whole Life (CFP Board Loves Whole Life)
  • Universal Life - Can adjust Premium & DB
48
Q

Permanent Life Insurance
(High Risk Tolerance)

A
  • Client controls the investment return
  • Assets part of a separate account
  • Variable Life
  • Variable Universal Life - Can adjust Premium & DB
49
Q

What are the Dividend Options on Life Insurance?

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

Remember: CRAPO

50
Q

What are the Nonforfeiture Options of Life Insurance?

A
  • Cash
  • Extended Term
  • Paid Up Reduced Amount
51
Q

What are the Life Insurance Settlement Options?

A
  • Cash
  • Pure Life/Single Life
  • Refund
  • Period Certain
  • Specified Income/Period
  • Interest Only
  • Joint and Survivor
52
Q

What is a Modified Endowment Contract (MEC)?

A
  • 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
53
Q

What are the MEC Grandfather Life Insurance rules?

A
  • 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.
54
Q

When are the proceeds in a Life Insurance policy taxable due to Transfer for Value?

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).

The main exceptions to this rule are:

A sale or transfer to the
* Insured (most common)
* Corporation in which the insured is a shareholder or officer
* Divorce
* Partner or partnership in which the insured is a partner

I C D P - I see dead people

55
Q

What are the 1035 Tax Free Exchange Rules?

A
  • Life → Life (OK)
  • Life → Annuity (OK)
  • Annuity → Annuity (OK)
  • Annuity → Life (NO WAY!)
56
Q

Buy Sell Stock Redemption

vs

Cross Purchase

A

Stock Redemption:

  • No Step up in Basis, Entity is owner and beneficiary

Cross-Purchase:

  • Step up in Basis, Individual owner is owner and beneficiary
57
Q

Split Dollar Insurance Endorsement Method

vs

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
58
Q

Explain Annuity Taxation

A

Periodic Payouts:

  • Basis / Calc’d Payout = Tax-free %
  • Ex: $100K / ($4K x 12mos x 20yrs)

Lump Sum Payouts:

  • LIFO (Interest First Rule)
  • Ordinary income plus 10% penalty if under 59½
59
Q

What are the characteristics of a

Flexible Spending Account (FSA)?

A
  • Must be used by March 15th or forfeited to the company (use it or LOSE it - Medical Only)
  • Dependent Care must be used by 12/31
  • Caps:
    • Medical $3,050
    • Dependent Care $5,000
  • 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)
  • Expenses for LTC services can NOT be reimbursed under a health FSA, but other medical expenses can be reimbursed.
60
Q

What are the major Tax Free Fringe Benefits?

A
  • 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
61
Q

When are 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.
62
Q

Property Loss Calculation
(Homeowner’s Policy)

A

Replacement Cost x Coinsurance Percent = Insurance Required

[(Insurance Carried / Insurance Required) x Loss] - Deductible = Amount paid by Insurance

63
Q

Homeowner’s Insurance
Required % of Replacement Value

A

Required %:
Homeowner’s Policy = 80%
Commercial Buildings = 90%

(Use 80% replacement coverage requirement if no percentage is given.

64
Q

Annuity Payout Over Lifetime Taxation
(Calculate Exclusion Ratio)

A

Monthly Payment x Life Expectancy (in Months) = Expected Return

Investment / Expected Return = Exclusion Ratio

Example:
$1,000 x 240 mos = $240,000
$50,000 / $240,000 = 20.833%
20.833% of each payment not taxable
NOTE Once basis used up (240 mos in example), further payments 100% taxable.

65
Q

Group Term Life
Income Tax Implications
(ER paid benefit)

A

No Tax on First $50K of Benefit.
Excess taxed on Cost (Table 1) minus Amount Paid.

Example
$250K Group Term Life
Employee Contributes $0.20/mo per $1k coverage
Table 1 Rate is $0.43 per $1k coverage

Monthly Cost $0.43 x 200 = $86 (x12=Amount on W-2)
Less Contribution $0.20 x 250 = $50
Total $36/mo x12 = $432

Note the Bold Items - Tend to Trip-up on These

66
Q

Voluntary Employee’s Beneficiary Association (VEBA)

A

Just remember:
No Deferred Comp in a VEBA

67
Q

HO-3 Policies:
What % of “A” coverage applies to B, C & D?

A

B (Other Structures)= 10% of A
C (Personal Property)= 50% of A
D (Loss of Use)= 30% of A

68
Q

LTC Insurance Deduction Eligiblity

A
  • Must be Qualified LTC
  • Subject to 7.5% of AGI floor
  • Based on Age:
    • 51-60 = $1,790/year
    • 61-70 = $4,770/year
  • Self-employed: Part of the premium is deductible on the 1040
69
Q

Life Insurance Provisions

A

APL: Automatic Premium Loan (Whole Life Only)

Reinstatement: Post default proof of insurability

Conversion: To Perm without proving insurability

70
Q

Viatical & Life Settlements
&
Policy Surrender
(Taxation)

A

Viatical (Terminally Ill)
* Tax-Free to Insured
* Viatical pays income tax on DB less (payment + subsequent premiums).

Life Settlement (Not Terminally Ill)
* LTCG for insured at time of settlement

Surrender
* Ordinary Income (& sometimes 10% penalty)
* Cash Value - (Premiums - Dividends that reduced premiums)

71
Q

Conditional Receipt

A

Death Benefit provided IF applicant found to be insurable.

If not, only premium paid will be returned.

Clark's Cards (9 decks)

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