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CFP - Review Cards > Insurance > Flashcards

Insurance Flashcards

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1
Q

Elements of an insurable risk

A
  1. there must be a sufficiently large number of homogeneous exposure units to make losses reasonably predictable
  2. the loss produced by the risk must be definite and measurable
  3. the loss must be fortuitous or accidental
  4. the loss must not be catastrophic to the insurance company
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2
Q

what type of company is most likely to use stop loss coverage to partially self insure its employee medical insurance program?

A

companies with as few as 100 employees

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3
Q

risk avoidance

A

a form of risk control
Examples:
-instead of purchasing property, rent it
-avoid buying a house with a swimming pool

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4
Q

Risk retention

A

a form of risk financing
examples:
-deductibles in insurance policies
-coinsurance in insurance policies
-self insurance

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5
Q

Risk reduction

A

a form of risk control
example:
-install sprinklers, smoke detectors, and burglar alarm
- create safety programs for businesses

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6
Q

risk diversification

A

a form of risk control
examples:
-store assets at different location(s)

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7
Q

risk transfer

A

a form of risk financing
example:
-insurance
-hold harmless agreements/hedging contracts
-incorporation of your business

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8
Q

“The insuring agreement”

A

the legally binding arrangement that explains the basic promise of the insurance company

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9
Q

“The declarations”

A

the factual statements identifying the specific person, property, or activity being insured

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10
Q

capital retention calculation

A

aka capital preservation
presumes that only interest is distributed
the original capital is still left at the end of the income period

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11
Q

vicarious liability

A

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

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12
Q

“Respondeat superior”

A

also known as vicarious liability

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13
Q

equation for coinsurance/required insurance in claims

A

Replacement cost x coinsurance = insurance required

insurance carried
[————————- x loss] - deductible
insurance required

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14
Q

HO2

A

broad form of all coverages

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15
Q

HO3

A

open perils for coverages A, B, and D
Broad for personal property

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16
Q

HO4

A

renters policy
broad form

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17
Q

HO6

A

condo policy

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18
Q

Errors and ommissions insurance

A
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19
Q

break point (in medical insurance)

A

the insurer begins to pay 100% of all medical expenses

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20
Q

COBRA time periods!

A

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

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21
Q

COBRA election period

A

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

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22
Q

high loss severity and low loss frequency

A

risk transfer (insurance)

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23
Q

high loss severity and high loss freqeuncy

A

avoidance
why? insurance premiums would be prohibitive

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24
Q

low loss severity and high loss frequency

A

retention and reduction
why? high frequency implies that transfer will be costly

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25
Q

low loss severity and low loss frequnecy

A

retention
why? these losses rarely occur

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26
Q

indemnity

A

insurer seeks to reimburse the insured for approximately the amount lost, no more or less

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27
Q

four principles supporting indemnity

A
  1. insurable interest
  2. the concept of actual cash value
  3. other insurance
  4. subrogation
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28
Q

what’s important to know about adhesion

A

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

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29
Q

rescission

A

contract is deemed null from its beginning due to fraud, misrepresentation, concealment, or mutual mistake of material fact

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30
Q

tort

A

wrongful act other than a breach of contract for which a civil action may be brought against the tortfeasor

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31
Q

capital utilization

A

leaves NO money at the end of the distribution period

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32
Q

capital retention (aka capital preservation)

A

presumes only interest is distributed
original capital remains

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33
Q

typical per diem for LTC

A

$204 - $400+

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34
Q

Companies that rate insurance companies

A

AM Best - A++ to F
Standard & Poor’s - AAA to CCC
Moody’s - Aaa to C
Weiss - A+ to F

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35
Q

how do you choose an insurance company based on rating?

A

should choose a company that holds one of the three highest ratings from at least three of the rating services

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36
Q

HO2 vs HO3

A

broad form for all coverages
HO3 is open perils for A, B, and D
HO3 is much more comprehensive

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37
Q

HO3 vs HO5

A

the only difference is that the contents are also covered under open form

38
Q

HO4

A

renters
no “dwelling” coverage (A and B)

39
Q

HO6

A

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)

40
Q

insurance and newly acquired auto

A

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

41
Q

if a spouse ceases to be a resident of the same household, he or she is still covered until the earliest of the following:

A

-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

42
Q

personal property floater

A

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

43
Q

workers comp reflects what type of liability?

A

absolute liability

44
Q

taxation of workers comp

A

benefits are received income tax free
employer may deduct the premium cost

45
Q

unemployment insurance

A

determined by previous earnings
payable up to 26 weeks
included in gross income

46
Q

medicare part a benefits

A

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

47
Q

medicare part b

A

medicare pays 80%
no stop loss

48
Q

penalties for non medical HSA withdrawal

A

20% (under age 65)

49
Q

noncancelable

A

individual can keep the policy in force, paying the stated premium
premium will NOT increase

50
Q

guaranteed renewable

A

can keep the policy
premiums can increase on a class basis

51
Q

long term care eligibility

A

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

52
Q

deductibility of LTC premiums

A

deductible limit increases with age
subject to 7.5% AGI floor

53
Q

length of medicaid lookback

A

5 years

54
Q

annual renewable term (ART)

A

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

55
Q

decreasing term

A

level premium but the death benefit decreases over time

56
Q

joint life insurance

A

written on the lives of two or more persons and payable upon the death of the first person to die

57
Q

endowments

A

if on the test, these are not the answer

58
Q

Cash option (dividend)

A

paid in cash (generally not taxable)

59
Q

reduction of premiums (dividend option)

A

insurance company subtracts the amount of the dividend from the premium due and sends a premium notice for the remainder

60
Q

accumulated with interest (dividend option)

A

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

61
Q

purchase paid up additions

A

each dividend is used to purcause a small amount of additional, fully paid up whole life insurance

62
Q

chronically ill

A

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

63
Q

life settlement

A

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

64
Q

taxation of whole life insurance

A

cash value above cost basis at the time of surrender is taxed as ordinary income

65
Q

withdrawals and loans (life insurance)

A

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

66
Q

USDA

A

Uniform Simultaneous Death Act
any persons who die within 120 hours of each other, predecease each other

67
Q

why is the designation of MECs important

A

MECs are modified endowment contracts
taxed like annuities

68
Q

a single premium policy issued after 1988

A

ALWAYS a MEC on the exam

69
Q

benefits of a buy sell agreement

A
  • 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
70
Q

taxation of key employee life insurance

A

business should be the owner and bene
premiums are nondeductible while the death benefits are tax free

71
Q

endorsement method of “split dollar plan”

A

ER owns the policy
ER pays premium
EEs bene gets balance of death benefit

72
Q

endorsement method “collateral assignment method”

A

EE is the owner
EE is shareholder
EE assigns the policy
At death or policy surrender ER receives premium paid

73
Q

assumption of annuities for the exam

A

generally, annuities are annuitized

74
Q

pure life annuity

A

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

75
Q

suitability of variable annuities

A

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

76
Q

taxation of investment income earned on annuities during the accumulation perido

A

generally not taxable until distributed to the contract holder

77
Q

taxation of annuity withdrawals

A

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

78
Q

4 conditions that must be met by group life insurance

A
  1. must provide a general DB which is excludable from gross income
  2. must be provided to a group of EEs as comp
  3. policy must be carried directly or indirectly by the ER
  4. amount of insurance provided to each EE must be computed under a formula that precludes individual selection of death benefits
79
Q

group term dependent coverage

A

NOT included in the $50k exemption
$2k limit
anything above that pays tax on the premium

80
Q

premium paid by ER on group EE life

A

deductible by the employer

81
Q

conversion of group life insurance

A

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

82
Q

section 125 cafeteria plans

A

must include a “cash option”
Note: a 401(k) arrangement can be offered under a cafeteria plan

83
Q

FSA “use it or lose it” note

A

employers may offer either a grace period or a rolling balance, but not both

84
Q

max tax free reimbursement under a dependent care FSA

A

$5k/year
BOTH spouses must earn income in order for the dependent care FSA to be available

85
Q

common expenses NOT reimbursable by DCFSA

A

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

86
Q

APL

A

automatic premium loan

87
Q

the possible hiccup with cash surrender in life insurance

A

there COULD be a 6 month delay to prevent a run on the bank
standard provision

88
Q

nonforfeiture options

A

cash
reduced paid up insurance
extended term

89
Q

dividend options

A

cash
reduced premium due
accumulate with interest
paid up additions
one year term/5th dividend

90
Q

settlement options

A

cash
interest only
fixed period
fixed installment
4 life income options

91
Q
A

CFP - Review Cards (17 decks)

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