Insurance Flashcards
Risk
A condition in which there is a possibility of a loss
Peril
The cause of a possible loss, the event insured against (eg. windstorm)
Hazard
A condition that may create or increase the chance of loss from a given peril (eg. type of construction or occupancy of the building)
Principle of Indemnity
The insurer generally seeks to reimburse the insured for approximately the amount lost, no more and no less
Insurable interest for property and casualty insurance
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.
Insurable interest for life insurance
Insurable interest need be present only at the time of inception.
Parts of the insurance contract
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
Attractive nuisance
A situation in which a high degree of care is imposed on the land occupier for certain conditions on the land
Negligence per se
A situation where the standard of care is set by a statute
Absolute liability
An extra hazardous condition which results in losses to others. Examples: keeping wild animals, blasting, etc. Workers’ comp reflects absolute liability
Strict liability
Is generally limited to manufacturers and distributors of defective products. Examples: Firestone tires, Ford motor, etc.
Vicarious liability
Occurs when one person is held liable for the negligent behavior of another person
Contributory negligence
Any negligence on the part of the injured party, even though slight, DEFEATS the claim.
Ex. jaywalking, drunk driving, etc.
Comparative negligence
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
Last clear chance
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
Capital utilization approach
This approach uses annuitization to provide needed income but leaves no money at the end of the presumed term.
Capital needs approach
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)
AM Best ratings (insurance)
A++ to F
Standard and Poor’s ratings (insurance)
AAA to CCC
Express authority
Written, explicit direction from principal (insurance company) to the agent – The agency agreement (contract)
Implied authority
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
Apparent authority
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.
Homeowners insurance coverages
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)
Basic form perils
WHARVES/FLT
Windstorm, Hail, Aircraft, Riot, Vandalism, Vehicles, Explosion, Smoke, Fire, Lightening, Theft
Broad form perils
WHARVES/FLT plus RAF
Rupture of system, Artificially generated electricity, Falling objects, Freezing of plumbing
Exclusions to all homeowners forms
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
HO-1
All basic
HO-2
All broad
HO-3
A: Open
B: Open 10% of A
C: Broad 50% of A
D: Open 30% of A
HO-5
Best option (also called HO 3-15)
A: Open
B: Open 10% of A
C: Open 50% of A
D: Open 30% of A
HO-8
Older home
Basic all
HO-4
Renters
4 rent, 4 letters in rent
C: Broad
D: Broad 30% C
HO-6
Condo
6 letters in condos
C: Open
D: Broad 50% of C
HO-7
Mobile home/trailer
Property loss calculation
[Insurance carried/Insurance required X Loss] - Deductible = Amount paid by insurance
What is the coinsurance percentage if not listed?
80% for HO policies
Commercial properties can be 90%
Auto insurance coverages
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)
Other than collision coverage
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
How much blood is covered with Medicare Part A?
Patient must cover the first 3 units of blood in a calendar year or have blood donated by the patient or someone else
Medicare Part A categories
1) Hospital care
2) Care in a nursing home or extended care facility
3) Home health services
4) Care in a hospice
Medicare Part B categories
1) Physician’s services
2) Home health services
3) Diagnostic tests
4) All outpatient services of a participating hospital
Medicare Part B covers ___% of approved charges
80% after deductible (no stop-loss limit)
Medicare Part A skilled nursing coverage
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
Health reimbursement arrangement (HRA)
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
Non-cancellable
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.
Less expensive than non-can because the premiums can increase.
How are disability benefits taxed to S-Corp
Owner of an S-Corp, tax-free benefits!!!
Section 1035 exchanges
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
APL provision
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
Reinstatement provision
Provides for a policy to be reinstated within a specified time period after the date of premium default (with proof of insurability)
How grandfathered status is lost for MECs
If death benefit increases by more than $150k, the contract becomes subject to material change rules and may lose its grandfathered status
Life insurance transfer for value exceptions
I C Dead People
Insured
Corporation
Divorce
Parter or partnership when insured is a partner
Refund annuity
Payout is at least equal to the value of the annuity
Qualified Longevity Annuity Contract (QLAC)
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
Dependent life coverage (group) taxation
Group term coverage on the lives of the employee’s spouse and dependents has $2000 tax free only (no $50k exclusion)
FSA grace period
2 1/2 months (none for dependent care FSA)
FSA rollover option
$610
FSA dependent care maximum
$5000 (no grace period or rollover)
Can FSAs be used to pay premiums?
No! Cannot be used to reimburse other health plan premiums (LTC, MSA, HSA)
Presumptive disability
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
When are MECs good options?
When in an ILIT
How are benefits taxes on MECs
Benefits are still tax free
Dividend options on life insurance
Cash
Reduce Premium
Accumulate with Interest
Paid up Additions
One-year Term/5th Dividend
Remember: CRAPO
Nonforfeiture options of life insurance
Cash
Extended Term
Paid Up Reduced Amount
Settlement options for life insurance
Cash
Pure Life/Single Life
Refund
Period Certain
Specified Income/Period
Interest Only
Joint and Survivor
What is a MEC?
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
What does Medicare not cover?
Routine foot care, glasses, hearing aids, and dental
Emergency Care outside the US (some exceptions for Canada, Mexico and Caribbean)
What does workers’ comp cover?
Unlimited Medical Expenses
Disability Income (TAX FREE)
Death Benefits
Rehabilitation (Medical and Vocational)
Absolute Liability
When are Fringe Benefits taxable?
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.
What are the major Tax Free Fringe Benefits?
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
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
When is an LTC policy qualified?
Must be guaranteed renewable
No cash value unless surrendering policy
Can’t provide benefits provided by medicare
Reformation
When the contract between the parties fails to express the original intent of the parties, the contract can be amended
Section 162 policy
Employer pays life insurance premium (deductible to company) and “gifts” policy to employee as a bonus. Employee chooses beneficiary
Medicare part A hospital stays
Deductible for the first 60 days
Higher deductible for the next 30 days
Inpatient hospital stays limited to 150 days
Which group insurance policies offer conversion features?
Life insurance
Health insurance
Short-term disability
*NOT long-term disability
Loss adjustment process
1) Notice of loss
2) Investigation
3) Proof of loss
4) Payment or denial
The “notice of loss” requirement would be found in which part of the insurance contract?
Conditions
This part spells out in details the duties and rights of both parties
What is the death benefit of a whole life policy?
Benefit + paid-up additions
Don’t add back in current cash value
Subrogation
When an insurer pays a claim, it takes over the legal rights its insured had against a negligent third party
Collateral source rule
Can still sue for damages even if plaintiff has insurance that covers the damages
How long can COBRA be claimed if qualifying event is eligibility for Medicare?
36 months for family
Conversion provision for life insurance
Insured may exchange term insurance for permanent insurance without evidence of insurability
Porovision, not a rider
How long is COBRA election period?
60 days after the actual notice of the event to the qualified beneficiary by the plan administrator
When are policy dividends from MECs taxable?
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
National Association of Insurance Commissioners (NAIC)
A voluntary association of insurance administrators from each state
No legal power
Enables state commissioners to exchange information and coordinate regulatory acitivities
Accumulated with interest
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
Capital retention calculation
Yearly income needed / (Inv. return % - inflation %) = amount of insurance needed + money for year 1 = Total insurance needed
Are HSA contributions subject to FICA/FUTA?
Yes
Direct employee contributions to health savings account are subject to FICA and FUTA taxes unless the
company has a section 125 cafeteria plan.
Are employer payments to Section 162 subject to FICA/FUTA?
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.
Human life value analysis
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.
Needs analysis
Estimate’s survivor’s needs that must be met following an individual’s premature death and compares those needs to the resources available.
Whole life insurance advantages
Provides permanent protection
Has a level premium
Combines savings (cash value) with protection
Whole life insurance disadvantages
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)
Accidental death/double indemnity
This normally doubles the standard death benefit if the insured dies accidentally. This extra benefit does not affect any needs analysis calculation
Uniform Simultaneous Death Act (USDA)
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.
Health FSA contribution limit
$3050
Voluntary employees’ beneficiary association (VEBA)
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.
Are occasional tickets a taxable benefit?
No, not taxable
Is interest paid on a loan from a policy’s cash value deductible for a business?
Yes, interest is tax deductible but limited for up to $50k loan per policy (not $50k interest)
What is respondeat superior?
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
