Insurance Flashcards
Principle of indemnity
The insurer generally seeks to reimburse the insured for approximately the amount lost, no more and no less
Insurable Interest - Property/Casualty
Insurable interest must be present at the time of inception and of claim (like owning a building).
In addition, the insured cannot transfer the contract to someone else.
Normally a new contract is issued.
Insurable Interest - Life Insurance
Insurable interest need be present only at the time of inception.
The insurable interest need not be present at time of death.
After a life insurance policy has been issued, the beneficiary designation and ownership can be transferred to anyone. There is no insurable interest requirement.
A change of beneficiary or ownership form must be submitted to the company after which they acknowledge the change.
Contract Characteristics - Subrogation
Subrogation gives the insurer all rights the insured possessed against negligent third parties.
It is a process of substitution; the insurer takes over the legal rights of the insured that existed at the time of the loss.
Contract Characteristics - Unilateral
Only one party is bound; the insured makes no promise.
Contract Characteristics - Adhesion
Contract is accepted “as is”. It is not negotiated.
Contract Characteristics - Waiver Provisions
Only the president, vice president, secretary, etc. may alter contract; it must be accepted “as is.”
Contract Characteristics - Aleatory
Number of dollars given up is unequal. Outcome is uncertain.
Characteristics of Insurable Risks
- Large number of homogeneous exposure units
- Loss must be definite and measurable
- Must be fortuitous or accidental
- Must not be catastrophic (to insurer)
Self-Insurance
Self-insurance describes a formal program of risk retention.
The business operates as an insurance company for its own risks.
This involves having a large number of similar potential losses, the ability to predict overall losses with reasonable accuracy, and the establishment of a fund for future losses and their possible fluctuations.
It is primarily used by, but not limited to, large companies.
Reminder for Homeowners Insurance Sections
Section 1
A - Abode
B - Buildings
C - Contents
D - Days Inn, ‘demnity, ‘dditional
Section II
E - Enemies (Liabilities)
F - First Aid (medical)
Property Excluded under Coverage C
(personal property coverage)
(1) Animals, birds, or fish
(2) Motorized land vehicles (not riding lawn mower) and aircraft
(3) Property of roomers, boarders, and other tenants (needs HO-4 renter’s policy)
(4) Property contained in an apartment regularly rented or held for rental to others by the insured (unless specifically endorsed)
Property Loss Question Tips
For HO policies, the coinsurance percentage is always 80% of replacement value.
However, for commercial buildings, the percentage can be 90%.
If depreciation information is not given, ACV cannot be correct.
The same formulas are used for commercial property as the prior homeowner’s question.
In addition, all calculations are always due to partial (not total) losses.
Remembering Personal Auto Policy Parts
A - “All my Fault” - Liability/BI/PD
B - “Bandages” - Medical
C - “Careless” - Uninsured Motorist
D - “Damage to Auto- Collision and Other than Collision
Health Reimbursement Account (HRA)
(Only C Corporations can use)
An HRA is an arrangement that:
- Is solely employer-funded and
- Reimburses employee for substantiated medical expenses up to a maximum amount per coverage period. Example: It can reimburse for out-of-pocket costs of an HDHP (High Deductible Health Plan).
Disability insurance Provisions
Residual benefits rider - Benefits are proportional to the amount of income lost and payable for the same duration as the policy’s maximum benefit period. Can work ½ time, get only ½ benefit
Partial disability rider - The benefit usually is 50% of the total disability benefit; the maximum payment period is limited (3-6 months) while the insured recuperates.
Disability waiver of premium provision - This provision may waive premiums if the insured policyholder becomes totally disabled and the disability lasts for some specified minimum period (90 days or longer). Note: Most individual disability policies include waiver of premium, but not all. For example, group disability policies do not have waiver.
Social insurance substitute benefit (extra benefit until Social Security pays)
For total disability, the monthly benefit will be equal to the social insurance substitute (SIS) benefit shown on the policy schedule page less any Social Insurance benefit received in that month.
Taxation of Disabilty Benefits for an S-Corp Owner
“Owner of an S-Corp Tax Free Benefits”
Business deducts it but its bonused to the owner. So it’s taxed now and tax free later.
Deductibility of LTC Premiums
- W-2 vs Self Employed
W-2
- First, subject to 7.5% AGI floor
- Then, limited to:
- Age 51-60: $1,790/yr
- Age 61-70: $4,770/yr
Self-Employed
- Limited to (depending on AGI):
- Age 51-60: $1,790/yr
- Age 61-70: $4,770/yr
Life Insurance Provisions
Incontestable - After two years, the validity of a contract cannot be questioned
(exception: fraud).
Suicide clause - If within two years the insured dies by suicide, the amount payable by the company shall be the premium paid.
Grace period - number of days allowed for premium in default
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 - provides for a policy to be reinstated within a specified time period after the date of premium default (with proof of insurability). Reinstatement = Reinsure
Conversion - exchange term for a permanent-type plan without having to prove evidence of insurability
Conversion = No underwriting
- For the exam, every policy has a conversion feature.
Viatical and Accelerated Benefits Rider
Accelerated benefits rider
- Due to a dreaded disease withdraws a % of the face value of the policy
- Result - tax-free money
- At Death: Beneficiary receives remainder tax-free.
Viatical settlements
- Due to a dreaded disease sells the policy for a % of the face value of the policy
- Result - tax-free money
- At Death: Viatical must pay ordinary income taxes above its basis (purchase price plus premiums paid).
Transfer for value
Life Settlements (non-viatical)
Darlene’s Dad
A life settlement usually describes a transaction involving an insured who is not terminally or chronically ill and is generally over age 65.
Since the settlement is not made to a terminally ill person, the participants in a life settlement transaction are taxed as part of the settlement and will be treated as a long-term gain.
Look for the LTCG answer.
Taxation of Surrendered Life Policies
Basis = Premiums Paid - Dividends
Taxable Gain = Cash Value - Basis
Taxed as ORDINARY INCOME
If there was a loan on the policy, your tax would be the same! (You never paid taxes on the loan) Phantom Income
Exception for Transfer for Value Taxation
“I C Dead People”
Sale/Transfer to:
I - Insured (your own policy)
C - Corporation you own/officer of
D - Divorce Decree
P - Partner/Partnership you are partner of
Qualified Longevity Annuity Contract (QLAC)
A QLAC is 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 payments will be.
In addition, QLACs can defer income tax by reducing RMDs.
Starting in 2023, QLACs may have up to $200,000 (adjusted for inflation) invested and the 25% limit has been eliminated.
