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Insurance Flashcards

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1
Q

Risk

A

A condition in which there is a possibility of a loss

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2
Q

Peril

A

The cause of a possible loss, the event insured against (eg. windstorm)

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3
Q

Hazard

A

A condition that may create or increase the chance of loss from a given peril (eg. type of construction or occupancy of the building)

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4
Q

Principle of Indemnity

A

The insurer generally seeks to reimburse the insured for approximately the amount lost, no more and no less

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5
Q

Insurable interest for property and casualty insurance

A

Insurable interest must be present at the time of inception AND of the claim (like owning a building). In addition, the insured cannot transfer the contract to someone else. Normally a new contract is issued.

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6
Q

Insurable interest for life insurance

A

Insurable interest need be present only at the time of inception.

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7
Q

Parts of the insurance contract

A

DDICE

Declarations - factual statements that identify the specific person or property

Definitions - explanation of key policy terms

Insuring agreements - the basic promise of the insurance company

Conditions - the duties and rights of both parties

Exclusions - circumstance when the insurer will not pay

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8
Q

Attractive nuisance

A

A situation in which a high degree of care is imposed on the land occupier for certain conditions on the land

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9
Q

Negligence per se

A

A situation where the standard of care is set by a statute

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10
Q

Absolute liability

A

An extra hazardous condition which results in losses to others. Examples: keeping wild animals, blasting, etc. Workers’ comp reflects absolute liability

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11
Q

Strict liability

A

Is generally limited to manufacturers and distributors of defective products. Examples: Firestone tires, Ford motor, etc.

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12
Q

Vicarious liability

A

Occurs when one person is held liable for the negligent behavior of another person

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13
Q

Contributory negligence

A

Any negligence on the part of the injured party, even though slight, DEFEATS the claim.

Ex. jaywalking, drunk driving, etc.

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14
Q

Comparative negligence

A

Any degree of negligence on the part of the injured party does not defeat the claim but is used to mitigate damages payable by the other party.

Ex. A is 20% negligent, B is 80% negligent

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15
Q

Last clear chance

A

Any contributory negligence of the injured party will not bar recovery if the other party, immediately prior to the accident, had a last clear chance to prevent the accident but failed to seize the chance.

Ex. road rage

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16
Q

Capital utilization approach

A

This approach uses annuitization to provide needed income but leaves no money at the end of the presumed term.

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17
Q

Capital needs approach

A

This approach factors interest only, so the original capital is still left at the end of the income period. It can also be called capital retention (or interest only)

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18
Q

AM Best ratings (insurance)

A

A++ to F

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19
Q

Standard and Poor’s ratings (insurance)

A

AAA to CCC

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20
Q

Express authority

A

Written, explicit direction from principal (insurance company) to the agent – The agency agreement (contract)

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21
Q

Implied authority

A

Is that which the public believes the agent holds and includes signage, rate books, etc. Implied authority enables the agent to carry out the principal’s business

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22
Q

Apparent authority

A

A rise out of the negligence of the principal in allowing the agent to appear to have the authority because of certain actions of the agent in the past. This typically affects terminated agents.

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23
Q

Homeowners insurance coverages

A

Section I:
A: Abode
B: Buildings/backyard
C: Contents (boats and trailers limited to $1000)

Section II:
D: Day’s inn
E: Liability (everyone wants to sue)
F: First aid (medical payments to others)

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24
Q

Basic form perils

A

WHARVES/FLT

Windstorm, Hail, Aircraft, Riot, Vandalism, Vehicles, Explosion, Smoke, Fire, Lightening, Theft

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25
Q

Broad form perils

A

WHARVES/FLT plus RAF

Rupture of system, Artificially generated electricity, Falling objects, Freezing of plumbing

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26
Q

Exclusions to all homeowners forms

A

OPEN WIF

Ordinance of law, Earth movement (earthquakes), Water damage (flood), Power failure, Neglect, War, Nuclear hazard, Intentional loss

Note: Sinkhole is a covered peril for the exam

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27
Q

HO-1

A

All basic

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28
Q

HO-2

A

All broad

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29
Q

HO-3

A

A: Open
B: Open 10% of A
C: Broad 50% of A
D: Open 30% of A

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30
Q

HO-5

A

Best option (also called HO 3-15)

A: Open
B: Open 10% of A
C: Open 50% of A
D: Open 30% of A

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31
Q

HO-8

A

Older home

Basic all

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32
Q

HO-4

A

Renters
4 rent, 4 letters in rent

C: Broad
D: Broad 30% C

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33
Q

HO-6

A

Condo
6 letters in condos

C: Open
D: Broad 50% of C

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34
Q

HO-7

A

Mobile home/trailer

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35
Q

Property loss calculation

A

[Insurance carried/Insurance required X Loss] - Deductible = Amount paid by insurance

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36
Q

What is the coinsurance percentage if not listed?

A

80% for HO policies
Commercial properties can be 90%

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37
Q

Auto insurance coverages

A

A: Liability (per person/per occurrence/property damage)

B: Medical payments (per person/per occurrence)

C: Uninsured motorist (per person/per occurrence)

D: Damage to auto (1. Collision, 2. Other than collision)

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38
Q

Other than collision coverage

A

Breakage of glass, loss caused by missiles, falling objects, fire, theft, larceny, explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, riot or civil commotion, and contact with birds or animals

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39
Q

How much blood is covered with Medicare Part A?

A

Patient must cover the first 3 units of blood in a calendar year or have blood donated by the patient or someone else

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40
Q

Medicare Part A categories

A

1) Hospital care
2) Care in a nursing home or extended care facility
3) Home health services
4) Care in a hospice

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41
Q

Medicare Part B categories

A

1) Physician’s services
2) Home health services
3) Diagnostic tests
4) All outpatient services of a participating hospital

42
Q

Medicare Part B covers ___% of approved charges

A

80% after deductible (no stop-loss limit)

43
Q

Medicare Part A skilled nursing coverage

A

Medicare pays all of the first 20 days of skilled care and everything over a specified amount per day ($200/day) for the next 80 days of skilled care. After that, patient pays all

44
Q

Health reimbursement arrangement (HRA)

A

C-Corps only

Is solely employer-funded

Reimburses employee for substantiated medical expenses up to a maximum amount per coverage period. Ex. It can reimburse for out-of-pocket costs of an HDHP

45
Q

Non-cancellable

A

Continuous term policy guaranteeing the insured’s right to maintain the policy at the stated premium

46
Q

Guaranteed renewable

A

Continuous right to maintain the policy, but the insurer may increase the premium by class of insureds.

Less expensive than non-can because the premiums can increase.

47
Q

How are disability benefits taxed to S-Corp

A

Owner of an S-Corp, tax-free benefits!!!

48
Q

Section 1035 exchanges

A

Life to life
Life to annuity
Annuity to annuity

Lindsay Lohan went to LA for AA, not AL

LL, LA, AA, no annuity to life

49
Q

APL provision

A

Automatic premium loan - applies to whole life only

If the insured does not pay the premium by the due date, the company automatically will pay the premium and charge it against the cash value of the policy

50
Q

Reinstatement provision

A

Provides for a policy to be reinstated within a specified time period after the date of premium default (with proof of insurability)

51
Q

How grandfathered status is lost for MECs

A

If death benefit increases by more than $150k, the contract becomes subject to material change rules and may lose its grandfathered status

52
Q

Life insurance transfer for value exceptions

A

I C Dead People

Insured
Corporation
Divorce
Parter or partnership when insured is a partner

53
Q

Refund annuity

A

Payout is at least equal to the value of the annuity

54
Q

Qualified Longevity Annuity Contract (QLAC)

A

A deferred fixed annuity funded from an IRA or qualified retirement plan designed to keep the client/spouse from outliving their retirement savings. As a deferred annuity, QLACs provide a guaranteed monthly stream of income later in life. The longer you defer the start date, the higher your payout will be. In addition, QLACs can defer income tax by reducing RMDs. Starting in 2023, QLACs may have up to $200k invested and the 25% limit has been eliminated

55
Q

Dependent life coverage (group) taxation

A

Group term coverage on the lives of the employee’s spouse and dependents has $2000 tax free only (no $50k exclusion)

56
Q

FSA grace period

A

2 1/2 months (none for dependent care FSA)

57
Q

FSA rollover option

A

$610

58
Q

FSA dependent care maximum

A

$5000 (no grace period or rollover)

59
Q

Can FSAs be used to pay premiums?

A

No! Cannot be used to reimburse other health plan premiums (LTC, MSA, HSA)

60
Q

Presumptive disability

A

Disability policies generally provide that full benefits will be paid if the insured loses his or her sight, speech, both hands, both feet, or one hand and one foot

61
Q

When are MECs good options?

A

When in an ILIT

62
Q

How are benefits taxes on MECs

A

Benefits are still tax free

63
Q

Dividend options on life insurance

A

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

Remember: CRAPO

64
Q

Nonforfeiture options of life insurance

A

Cash
Extended Term
Paid Up Reduced Amount

65
Q

Settlement options for life insurance

A

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

66
Q

What is a 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

67
Q

What does Medicare not cover?

A

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

68
Q

What does workers’ comp cover?

A

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

69
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.

70
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

71
Q

Endorsement method

A

Employer is the owner
Employee is not a shareowner

72
Q

Collateral Assignment Method

A

Employee is owner
Employee is a Shareholder
Employee assigns the policy

73
Q

When is an LTC policy qualified?

A

Must be guaranteed renewable

No cash value unless surrendering policy

Can’t provide benefits provided by medicare

74
Q

Reformation

A

When the contract between the parties fails to express the original intent of the parties, the contract can be amended

75
Q

Section 162 policy

A

Employer pays life insurance premium (deductible to company) and “gifts” policy to employee as a bonus. Employee chooses beneficiary

76
Q

Medicare part A hospital stays

A

Deductible for the first 60 days

Higher deductible for the next 30 days

Inpatient hospital stays limited to 150 days

77
Q

Which group insurance policies offer conversion features?

A

Life insurance
Health insurance
Short-term disability

*NOT long-term disability

78
Q

Loss adjustment process

A

1) Notice of loss
2) Investigation
3) Proof of loss
4) Payment or denial

79
Q

The “notice of loss” requirement would be found in which part of the insurance contract?

A

Conditions

This part spells out in details the duties and rights of both parties

80
Q

What is the death benefit of a whole life policy?

A

Benefit + paid-up additions
Don’t add back in current cash value

81
Q

Subrogation

A

When an insurer pays a claim, it takes over the legal rights its insured had against a negligent third party

82
Q

Collateral source rule

A

Can still sue for damages even if plaintiff has insurance that covers the damages

83
Q

How long can COBRA be claimed if qualifying event is eligibility for Medicare?

A

36 months for family

84
Q

Conversion provision for life insurance

A

Insured may exchange term insurance for permanent insurance without evidence of insurability

Porovision, not a rider

85
Q

How long is COBRA election period?

A

60 days after the actual notice of the event to the qualified beneficiary by the plan administrator

86
Q

When are policy dividends from MECs taxable?

A

Subject to current year income tax when dividends are received in cash or used like cash to reduce upcoming premiums or pay back policy loans

Not taxable when accumulated with income, but the interest is taxable

87
Q

National Association of Insurance Commissioners (NAIC)

A

A voluntary association of insurance administrators from each state

No legal power

Enables state commissioners to exchange information and coordinate regulatory acitivities

88
Q

Accumulated with interest

A

Dividend option

Dividends remain in interest-bearing acct with insurance company

Dividends added to death benefit proceeds or cash value if policy is surrendered

Interest paid is taxable

89
Q

Capital retention calculation

A

Yearly income needed / (Inv. return % - inflation %) = amount of insurance needed + money for year 1 = Total insurance needed

90
Q

Are HSA contributions subject to FICA/FUTA?

A

Yes

Direct employee contributions to health savings account are subject to FICA and FUTA taxes unless the
company has a section 125 cafeteria plan.

91
Q

Are employer payments to Section 162 subject to FICA/FUTA?

A

Yes.

Section 162 arrangements represent a bonus in the form of life or disability insurance from an employer
to retain a valued executive. As a bonus the employer-paid premium for the insurance that is given to the
employee is treated as compensation subject to FICA and FUTA tax as well as to federal income tax.
Certain employers may gross up the bonus to cover the employee’s tax exposures.

92
Q

Human life value analysis

A

Based on the insured individual’s income-earning ability; it is present value of the income lost by dependents as a result of the insured’s death. Does not consider other resources available to provide for income and cash needs because of an individual’s premature death.

93
Q

Needs analysis

A

Estimate’s survivor’s needs that must be met following an individual’s premature death and compares those needs to the resources available.

94
Q

Whole life insurance advantages

A

Provides permanent protection

Has a level premium

Combines savings (cash value) with protection

95
Q

Whole life insurance disadvantages

A

Premiums must be paid for lifetime (or limited-pay)

Premiums are higher than term at the beginning

It is generally not flexible to meet changing needs (limited to nonforfeiture options)

96
Q

Accidental death/double indemnity

A

This normally doubles the standard death benefit if the insured dies accidentally. This extra benefit does not affect any needs analysis calculation

97
Q

Uniform Simultaneous Death Act (USDA)

A

Provides that any persons who dies within 120 hours of each other, by law, predecease each other. This rule keeps the property of one deceased person from passing through the estate of another deceased person before passing to those who survive both.

98
Q

Health FSA contribution limit

A

$3050

99
Q

Voluntary employees’ beneficiary association (VEBA)

A

Employers may establish a VEBA to fund certain benefits for its members. Benefits can include:

Death benefits
Medical expenses
Disability benefits
Legal expense benefits
Unemployment benefits
Child care benefits
Severance benefits
Education benefits

Contributions (within limits) are a deductible expense for the employer.

100
Q

Are occasional tickets a taxable benefit?

A

No, not taxable

101
Q

Is interest paid on a loan from a policy’s cash value deductible for a business?

A

Yes, interest is tax deductible but limited for up to $50k loan per policy (not $50k interest)

102
Q

What is respondeat superior?

A

Holding employer responsible for actions of employee/subordinate

Example: Paraplanner gives bad advice while advisor is on vacation. Advisor is held liable under respondeat superior

CFP (6 decks)

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