Insurance Flashcards
Elements of an insurable risk
- there must be a sufficiently large number of homogeneous exposure units to make losses reasonably predictable
- the loss produced by the risk must be definite and measurable
- the loss must be fortuitous or accidental
- the loss must not be catastrophic to the insurance company
what type of company is most likely to use stop loss coverage to partially self insure its employee medical insurance program?
companies with as few as 100 employees
risk avoidance
a form of risk control
Examples:
-instead of purchasing property, rent it
-avoid buying a house with a swimming pool
Risk retention
a form of risk financing
examples:
-deductibles in insurance policies
-coinsurance in insurance policies
-self insurance
Risk reduction
a form of risk control
example:
-install sprinklers, smoke detectors, and burglar alarm
- create safety programs for businesses
risk diversification
a form of risk control
examples:
-store assets at different location(s)
risk transfer
a form of risk financing
example:
-insurance
-hold harmless agreements/hedging contracts
-incorporation of your business
“The insuring agreement”
the legally binding arrangement that explains the basic promise of the insurance company
“The declarations”
the factual statements identifying the specific person, property, or activity being insured
capital retention calculation
aka capital preservation
presumes that only interest is distributed
the original capital is still left at the end of the income period
vicarious liability
when one person is held liable for the negligent behavior of another person.
Example: a branch manager at the broker-dealer who is responsible for the representatives, and a manager at an insurance agency who is responsible for the agents
“Respondeat superior”
also known as vicarious liability
equation for coinsurance/required insurance in claims
Replacement cost x coinsurance = insurance required
insurance carried
[————————- x loss] - deductible
insurance required
HO2
broad form of all coverages
HO3
open perils for coverages A, B, and D
Broad for personal property
HO4
renters policy
broad form
HO6
condo policy
Errors and ommissions insurance
break point (in medical insurance)
the insurer begins to pay 100% of all medical expenses
COBRA time periods!
18 months for voluntary or involuntary termination, change from full to part time
36 months for EE death, divorce, legal separation or eligibility for medicare
36 months for loss of dependent status
COBRA election period
60 days after the actual notice of the event to the qualified beneficiary by the plan administrator
high loss severity and low loss frequency
risk transfer (insurance)
high loss severity and high loss freqeuncy
avoidance
why? insurance premiums would be prohibitive
low loss severity and high loss frequency
retention and reduction
why? high frequency implies that transfer will be costly
low loss severity and low loss frequnecy
retention
why? these losses rarely occur
indemnity
insurer seeks to reimburse the insured for approximately the amount lost, no more or less
four principles supporting indemnity
- insurable interest
- the concept of actual cash value
- other insurance
- subrogation
what’s important to know about adhesion
because insurance policies are generally contracts of adhesion, in the event of ambiguity, the courts are likely to rule in favor of the insured and against the insurer
rescission
contract is deemed null from its beginning due to fraud, misrepresentation, concealment, or mutual mistake of material fact
tort
wrongful act other than a breach of contract for which a civil action may be brought against the tortfeasor
capital utilization
leaves NO money at the end of the distribution period
capital retention (aka capital preservation)
presumes only interest is distributed
original capital remains
typical per diem for LTC
$204 - $400+
Companies that rate insurance companies
AM Best - A++ to F
Standard & Poor’s - AAA to CCC
Moody’s - Aaa to C
Weiss - A+ to F
how do you choose an insurance company based on rating?
should choose a company that holds one of the three highest ratings from at least three of the rating services
HO2 vs HO3
broad form for all coverages
HO3 is open perils for A, B, and D
HO3 is much more comprehensive
HO3 vs HO5
the only difference is that the contents are also covered under open form
HO4
renters
no “dwelling” coverage (A and B)
HO6
normally association covers the structure
Coverage A and C can both be changed by endorsement to apply on an open perils basis (best answer for the exam)
insurance and newly acquired auto
if a new auto replaces an existing vehicle, automatically insured for parts a, b, and c
there is no automatic coverage unless the insurance company is notified within 14 days of acquisition
if a spouse ceases to be a resident of the same household, he or she is still covered until the earliest of the following:
-the end of 90 days following the spouse’s change of residency
-the effective date for the spouse’s own new policy
-the end of the policy period
personal property floater
designed primarily to provide “open perils” coverage for unscheduled personal property on a worldwide basis
the coverage is for property that “floats” like cameras, jewelry, sporting equipment, etc
workers comp reflects what type of liability?
absolute liability
taxation of workers comp
benefits are received income tax free
employer may deduct the premium cost
unemployment insurance
determined by previous earnings
payable up to 26 weeks
included in gross income
medicare part a benefits
hospital stays are subject to deductible for the first 60 days
second deductible for the next 30 days
third deductible for the next 60 days
inpatient hospital care is limited to 150 days
medicare part b
medicare pays 80%
no stop loss
penalties for non medical HSA withdrawal
20% (under age 65)
noncancelable
individual can keep the policy in force, paying the stated premium
premium will NOT increase
guaranteed renewable
can keep the policy
premiums can increase on a class basis
long term care eligibility
the individual is expected to be unable to perform, without substantial assistance from another person, at least two activities of daily living for at least 90 days
deductibility of LTC premiums
deductible limit increases with age
subject to 7.5% AGI floor
length of medicaid lookback
5 years
annual renewable term (ART)
policy provides protection for one year only
permits the insured to renew the policy for successive periods of one year at a higher premium each year without having to furnish evidence of insurability
decreasing term
level premium but the death benefit decreases over time
joint life insurance
written on the lives of two or more persons and payable upon the death of the first person to die
endowments
if on the test, these are not the answer
Cash option (dividend)
paid in cash (generally not taxable)
reduction of premiums (dividend option)
insurance company subtracts the amount of the dividend from the premium due and sends a premium notice for the remainder
accumulated with interest (dividend option)
dividends remain with the insurance company in an internet bearing account.
interest paid on the dividends is taxable
dividends are added to the death proceeds or, it the policy is surrendered, to the cash value
purchase paid up additions
each dividend is used to purcause a small amount of additional, fully paid up whole life insurance
chronically ill
must meet one of the following:
1. unable to perform at least two activities of daily living
2. a certain level of disability
3. requires supervision for protection due to severe cognitive impairment
life settlement
NOT terminally ill
generally over 65
taxed as follows:
1. tax free basis (premium paid)
2. ordinary income from the basis to the policy’s cash surrender value
3. long term capital gains from the higher of either the cash surrender value (or the federal income tax basis) to the net settlement proceeds
taxation of whole life insurance
cash value above cost basis at the time of surrender is taxed as ordinary income
withdrawals and loans (life insurance)
do not count as taxable income unless the policy is surrendered or lapses and the amount owed exceeds what was paid in
in that case the loan becomes a taxable event
USDA
Uniform Simultaneous Death Act
any persons who die within 120 hours of each other, predecease each other
why is the designation of MECs important
MECs are modified endowment contracts
taxed like annuities
a single premium policy issued after 1988
ALWAYS a MEC on the exam
benefits of a buy sell agreement
- guarantees a market for the business interest
-provides liquidity for the payment of death taxes and other estate settlement costs of the deceased owner
-helps establish the estate tax value of the decedent’s business interest
-enables the business to continue in the hands of the remaining owners
-makes a business a better credit risk
taxation of key employee life insurance
business should be the owner and bene
premiums are nondeductible while the death benefits are tax free
endorsement method of “split dollar plan”
ER owns the policy
ER pays premium
EEs bene gets balance of death benefit
endorsement method “collateral assignment method”
EE is the owner
EE is shareholder
EE assigns the policy
At death or policy surrender ER receives premium paid
assumption of annuities for the exam
generally, annuities are annuitized
pure life annuity
DB for as long as the annuitant lives
payments cease upon their death
advantages
-guaranteed stream of income
-no value remains to be subject to estate taxes
-highest payout
disadvantages
-no inflation hedge
-cannot “commute” the remaining value
-if death before return of principal, nothing is left for benes
suitability of variable annuities
suitable for clients with moderate to high risk tolerance
if a question asks about “attempts to cope with inflation” or “keep up with market conditions” - variable products are generally the right choice
taxation of investment income earned on annuities during the accumulation perido
generally not taxable until distributed to the contract holder
taxation of annuity withdrawals
issued after 8/13/1982 = LIFO
withdrawal is taxable interest to the extent that the cash surrender value of the contract exceeds the investment
IN ADDITION - withdrawals by contract owners prior to age 59 1/2 are subject to a 10% premature withdrawal penalty on the ordinary income tax
4 conditions that must be met by group life insurance
- must provide a general DB which is excludable from gross income
- must be provided to a group of EEs as comp
- policy must be carried directly or indirectly by the ER
- amount of insurance provided to each EE must be computed under a formula that precludes individual selection of death benefits
group term dependent coverage
NOT included in the $50k exemption
$2k limit
anything above that pays tax on the premium
premium paid by ER on group EE life
deductible by the employer
conversion of group life insurance
any EE whose group life insurance coverage ceases has the right to convert to an individual life insurance policy
conversion can be made to any type of PERMANENT plan
premium will reflect the insured’s age at the conversion
section 125 cafeteria plans
must include a “cash option”
Note: a 401(k) arrangement can be offered under a cafeteria plan
FSA “use it or lose it” note
employers may offer either a grace period or a rolling balance, but not both
max tax free reimbursement under a dependent care FSA
$5k/year
BOTH spouses must earn income in order for the dependent care FSA to be available
common expenses NOT reimbursable by DCFSA
tuition and fees
expenses for children age 13 and older
late payment fees
overnight camp
field trips, clothing and food
transportation to and from the dependent care provider
APL
automatic premium loan
the possible hiccup with cash surrender in life insurance
there COULD be a 6 month delay to prevent a run on the bank
standard provision
nonforfeiture options
cash
reduced paid up insurance
extended term
dividend options
cash
reduced premium due
accumulate with interest
paid up additions
one year term/5th dividend
settlement options
cash
interest only
fixed period
fixed installment
4 life income options
