Insurance Flashcards
Morbidity vs Mortality
Morbidity is the incident and severity of sickness and accidents where mortality is death.
Adverse Selection
Tendency of above-average risky people seeking insurance.
Advantages and Disadvantages of Self-Insurance
Advantages: Company can avoid the costs and grow the reserves saved for future claims to offset the cost of the program.
Disadvantages: Can leave the company exposed to a large loss. They also have to duplicate the services of an insurance company and have to pay tax on income from the reserves fund.
Contract Characteristics
Unilateral: Only one side has a binding promise.
Adhesion: Contract is accepted “as is” or not at all.
Waiver Provision: Only the upper level of insurance company can change the contract. Agent cannot.
Aleatory: Amount of money exchanged is uneven.
Rescission: Contract can be deemed null if fraud, misrepresentation, or concealment is present.
Reformation: Contract can be amended.
Collateral Source Rule: Can receive from insurance but also sue the guilty party.
Subrogation: Insurance will pay your claim then go after guilty party.
Reporting a Loss Adjustment Process
- Submit a claim
- Insurer investigates there was a loss and whether the loss is covered.
- Proof of loss - Insured files a signed proof of loss.
- Payment or denial.
Who’s covered under a PAP policy?
Named insured
Family member living in the same household
Spouse if living in the same household
Any person using the auto with insured’s permission
College counts for a kid if they are not living with you
Options of insurer for claim adjustment
Replace
Abandonment or Salvage
Pair or Set (Cash for difference between ACV before and after accident)
Liability excluded under homeowner’s vs umbrella
Homeowner’s liability exclusions:
- Business Activities
- Workers Comp
- Cars (unless small and on the property)
- Aircraft
- Larger boats (small boats included)
Umbrella liability exclusions:
- Business activities
- Claims against your own property
- Workers Comp
- Intentional Acts
Max Length of unemployment
26 weeks (13 more if very bad unemployment)
Workers comp vs unemployment taxation
Workers comp is not taxed and unemployment is taxable
Business owners policy
Covers real property, contents, and liability
best for small to medium sized companies
professional liability is excluded
premium is deductible
Major Medical Plans Functions
Deductible: You pay this first
Stop-Loss: The amount that you pay up too with the coinsurance, this is not a max out of pocket
Coinsurance: percentage you pay
Deductible is not a part of the stop loss, that is separate.
$10k claim, $500 deductible, $5k stop loss, 80/20
You pay $500, then 20% on $5k for a total of $1,500 and insurance pays $8,500
Who qualifies for Medicare?
Anyone over 65 and eligible for SS or railroad benefits
Disabled people receiving benefits for at least 2 years of any age.
Disabled Widow or widower age 50 and older who was married to a worker.
Anyone over age 18 who was disabled before 22.
Disabled qualified railroad retirement workers.
Disabled people automatically get part A and B.
Coverage of Medicare Parts A, B, Medigap, and D
Part A:
- Hospital stays (deductible)
- Post hospital skilled nursing care
- Post hospital home care
- Hospice care
- Patient pays for first 3 pints of blood, covered after that
- Copays too
Part B:
- Basically anything that is non hospital medical attention except eye, ear, mouth, immunizations, and self taken pills.
- Includes doctor services, house visits, office visits, tests, outpatient, home health unlimited, preventative care, depression screening.
- Coverage is deductible with 80/20 with no cap.
- does cover one free flu shot per year
Medigap: Need Part A and B, this can pay deductibles, coinsurance, and fill in the gaps of coverage. 10 different policies. Pays for 80% of charges.
Part D:
- Covers self taken drugs, need to be in Part A and/or Part B to get D
Part B and D pay premiums that are taken from 2 years prior
Anyone qualified for Medicaid automatically qualifies for Part D
Group Medical Plan Tax Considerations
Premiums paid by employer are not taxable income to employee and deductible by employer.
Taxable if benefits exceed medical expenses incurred.
S-E, S-Corp 2% owners, and partners can take above the line deduction for premiums
Time Requirements for Filing for Medicare Part B, COBRA, and Group Health Conversion Plans
Medicare Part B needs to be signed up for when you can in 8 months, if past this the premium will increase.
Medigap needs to be signed up for 6 months after signing up for B.
COBRA starts from date of event to 60 days after they notify you. Have 45 days to pay premium. Cost can go up to 102%
Conversion plan: sign up ASAP after leaving work or 180 days before COBRA ends. Pay premium in 31 days.
HSA Facts
Medigap premiums are basically the only thing not allowed from HSA.
EE and ER contributions aggregate to max $4,150 or $8,300
HDHP Deductible: $1,600 or $3,200
HDHP MOP: $8,050 or $16,100
55 and older has $1k catch-up
Before 65 there is a 20% penalty and taxed, after 65 it is only taxed
Can contribute if under a HDHP and not enrolled in Medicare
ER contributions are deductible and not income
HRA Highlights
Employer funded (not available under cafeteria plan)
Reimbursed amounts excluded from EE income
Can reimburse expenses after employment
Employee cannot be reimbursed for same expenses from HRA and FSA
Employer retains funds
The funds can be rolled over year after year to a set limit by the employer.
Conditionally Renewable Provision for Disability
Noncancellable renewable policy to continue beyond age 65. Usually only has a 2-year period and premium is adjusted. Can only be used if still an employee.
Presumptive Disability
Most policies have that total disability benefits will be paid if:
Lose sight, hearing, or speech
Both hands, both feet, or one hand and one foot
Homeowner’s coverage amount (based on A - dwelling)
B - 10%
C - 50%
D - 30%
HO-6 is open for C and 50% for D
Typical amount of Disability coverage
50-60% can be lower if higher income
Provisions (Riders) for Disability Insurance
Partial Disability: Most add this at no cost. Benefits start after a period of total disability and last up to 5 months. Usually 50% of total disability benefit.
Residual Disability Benefit: Expensive, benefits are payable for a max benefit period under the contract. Benefit is payable in proportion to the insured’s reduced earnings, this is an own occupation rider. (20-80% range)
Guaranteed Insurability: The insured has the right to purchase additional amounts of coverage without new proof of insurability. Still subject to financial underwriting.
COLA Adjustment: Benefits are increased with COLA.
Social Insurance Substitute: Monthly benefit of this amount will decrease by any SS benefits received. If none are received it will pay out fully.
Taxation of disability premiums if owner of partnership or greater than 2% owner of S-Corp
Considered conduit income, so premium is deductible by (S-Corp or partnership) but then is income to the employee (owner and reported on K-1) and benefits are received tax-free because the employee is technically paying the premium (conduit)
Definition of chronically ill person (eligibility for LTC):
Cant meet 2 of the 6 ADLS or has substantial cognitive impairment (alzheimer’s)
ADLS: Dressing, eating, bathing, moving, toilet, and continence
Taxation Rules for LTC premiums
For qualified LTC policies, premiums paid can be itemized along with unreimbursed medical expenses. Qualified means there is no cash value built up.
There is an age dollar limitation for itemizing the deduction that increases with age.
Premiums get more expensive with age and poor health.
FSA cannot be used for LTC premiums or LTC expenses but a HSA can be for both premiums of qualified LTC policies and expenses.
LTC policies must be guaranteed renewable.
Medicare limitations for LTC
Part A can cover some parts but only when:
spent at least 3 days in a hospital first
get approval from a doctor to go to skilled nursing care
get expected to improve (Alzheimer’s does not improve)
first 20 days covered but after that you need to pay first $204, Medicare covers after that.
need to get to LTC facility within 30 days of hospital visit
Medicaid eligiblity
Need less than $2k countable assets and lower than a certain amount of income
Funded federally and state level but administered on the state level
Exclusions: Medicaid look back rule: if any assets were transferred within 5 years and you need Medicaid services, you will not qualify.
Ineligible if you have more than $700k of home equity.
If you have an annuity you need to make the state the beneficiary
Determining amount of life insurance needed
Needs Analysis: Amount of insurance that you need less the assets that you already have.
Human Life Approach: PV of all your income streams
Paying for LTC
pay per day of coverage
premiums get more expensive with age
Premiums are deductible by employer
A vs B Death Benefit Payout
A is death benefit only.
B is death benefit plus CV.
ONLY with universal policies.
Different types of term insurance policies
Annual Renewable Term: Protection is provided for one year at a time and can renew every year with no evidence of insurability but premiums will increase.
Level Term: Stays the same.
Re-entry Provision: Have to do a health test one the term policy ends, if you fail the premium can be much higher but if you succeed then you get more term for a similar amount. Simplified underwriting process.
Decreasing Term: Best used for mortgage.
First to Die (Joint): Used for buy-sell agreement or mortgage or debt.
Term Insurance Provisions
Guaranteed Renewability: You have the right to renew the policy for a limited number of years. Usually an age limit is imposed where you can’t do this. Usually one-year periods and no health test required.
Convertibility: Can convert the term policy into a permanent insurance policy without evidence of insurability within a specific time frame.
Different Types of Whole Life
Straight Life: Level premium, level death benefit
Limited-pay: Pay for a period of years then stop with continued coverage. Best if you believe you will have a long life expectancy.
Advantages of whole
Pro: Level premium, coverage, and cash value
Con: Premiums for whole time, little flexibility with non-forfeiture options, and higher premiums than term
Universal Insurance
Cash value paid at current rates, premium, cash value, and death benefit can fluctuate.
Cash value not guaranteed.
Additional premiums may be needed to keep the policy afloat.
*Kids cannot own life policies
Cash Value and Loans
Loans outstanding reduce death benefit.
Cash value is given back to company.
Variable Life Benefit
Risky investments (need series 6 or 7 and variable life insurance license to sell since they are investment products watched by SEC and FINRA)
Assets held in separate account so won’t be frozen if company goes down.
Good to have in some buy-sell agreements because of the growth possible in the account.
Endowments
BAD Option for insurance, technically not a contract
Second-to-die Policies
Great for estate liquidity.
Permanent Insurance Provision (no additional premiums)
Automatic Premium Loan: If selected by insured, when they don’t pay the premium past the grace period, company will automatically pay the premium and charge it to the cash value
Note: if doing one of the nonforfeiture parts from a permanent policy and it was in APL, will need to prove insurability
Grace Period: Have 31 days after premium is due to pay
Reinstatement Clause: Owner of a lapsed policy can reacquire the policy if get reinsured and pay all the premiums and interest. Premiums stay the same.
Incontestable Clause: Insurer can’t look back and contest the policy after 2 years unless:
- no insurable interest at the issuance of policy
- intent to murder
- healthier person took the test for them
Suicide Clause: Will return premium if suicide within first 2 years.
Riders (extra premium applies)
Disability waiver of premium: Whole life policies the premium is waived if completely and totally disabled. For universal policies can choose to waive the expenses so cash value grows or premium.
Guaranteed insurability option: insured may purchase additional insurance regardless of insurability at three-year intervals up to a specified age.
Accidental death: double benefit if death is accidental.
NAIC
Voluntary association of insurance administrators from each state. NAIC has no legal power over regulation but it enables state commissioners to exchange info and coordinate regulatory activities.
Oversees state accreditation program, promotes law and regulation uniformity, transmits information to regulators, and protects the interest of policy owners while preserving state regulations
Has 12 ratios, if 4 are not met by an insurance company, it is on their watchlist
Life Insurance Policy Illustration Model Law
Only for non-variable life insurance policies
- All illustrations must be certified annually by actuary.
- Copies need to be sent to insurer.
- Copies must be signed by insured and agent.
- Insured must be given insurance company report at time of sale.
- Policy cannot be represented as anything other than life insurance.
- Cannot use vanish.
Illustrations must include the following:
- Name of insurer
- Name of producer/agent
- Name of insured
- Underwriting and rating classification
- Initial death benefit
Viatical Settlement and Viatication and Life Settlements
Selling a policy for less than its full face value.
Viatical payments when done by someone who is terminally ill to a business that buys the policies. If terminally ill, the entire amount received by the ill person is tax free and cannot be retroactively taxed if they get better.
Life settlement is a transaction with someone who is not terminally ill and over 65. It is taxable.
Accelerated Benefits
Chronically Ill vs Terminally Ill
Accelerated benefits are paid out if included in the policy for the amount stated for the benefit. Received tax free for terminally ill and received tax free for chronically ill if used for medical expenses (LTC).
Terminally Ill: 24 months or less to live or qualified medical condition are acute like coronary artery disease, neurological deficit, renal failure, or AIDS. Need a doctor certification that you are terminally ill.
Chronically ill: cannot perform 2 of 6 ADLS, certain level of disability, or requires supervision.
Taxation of Loans and Dividends
Loans: Not taxable (if not a MEC) but reduces the death benefit. Does count as income if when surrendered or lapsed, if amount owed exceeds what was paid in.
Dividends: Return of basis or premium, so not taxed (unless a MEC).
Uniform Simultaneous Death Act (USDA)
If two people die within 120 hours, they both count as having died before the other person.
Dividends paid under a MEC
Does a MEC count as a life insurance contract?
If used to reduce premiums or pay off existing loan, then it is taxable.
A MEC meets the definition of a life insurance contract.
MEC Transitioning and Loans
Once a MEC, always a MEC. Even if going from a MEC to a non-MEC, it is still treated as a MEC.
Loans are also considered withdrawals so subject to LIFO and 10% penalty is before 59-1/2.
IRC Definition of Life Insurance
Meets the cash value accumulation test
Or
The guideline premium and corridor test
*MEC qualifies as a life insurance contract
Material Change to life insurance
Increasing the death benefit
MEC Dividend taxability
If dividends are received in cash, used to reduce premiums, or used to repay the policy loan then that is taxable as income.
1035 Exchange Ownership
If making a 1035 exchange, owner and insured for life insurance and same owner and annuitant for annuities.
Buy Sell - Stock Redemption (Entity Purchase) Qualities for life and disability
Corporation is owner and beneficiary. Best with multiple owners.
Premiums are nondeductible for both life and disability. Death Benefit tax-free.
When company owner dies, their estate gets step up, corporation uses death benefits to buy the shares, the other owners get no step up in basis.
If disability, the owner that is disabled sells his shares for capital gain above basis.
Can be accessed by creditors.
Buy Sell - Cross Purchase Qualities for life and disability
Owners buy policies on other owners. If A is getting a policy on B’s life, A is the owner and beneficiary.
Premiums are nondeductible for both life and disability. Death Benefit tax-free.
When company owner dies, their estate gets step up, other owner uses death benefits to buy the shares, the other owners get step up.
If disability, the owner that is disabled sells his shares for capital gain above basis.
Cannot be accessed by creditors.
Key Employee Life Insurance
Business buys insurance on an important employee. Premiums are not deductible, benefits are tax free.
Hint: If the employer in some way is the beneficiary of the policy, then the premiums are not deductible by the employer.
Employer is the owner and beneficiary.
Endorsement Method vs Collateral Assignment Method for Split Dollar Plans
Endorsement Method:
- When the policy is surrendered or at death, company gets higher of the cash value or premiums paid. (Employer is first beneficiary for their portion)
- Employer owns and employee is not a shareholder.
- Premiums are not deductible.
Collateral Assignment:
- When policy is surrendered or at death, company gets the premiums paid. Employee gets cash value or death benefit.
- Employee owns and is a shareholder.
- Premiums are not deductible.
- Employer is first beneficiary.
Business Overhead Insurance (BOE)
This covers expenses if employer is totally disabled but only to cover expenses, not employer salary up to 1-2 years.
Self Employed people can deduct premiums but benefits are taxable.
Corporations cannot deduct premiums but benefits are not taxable.
Types of Annuities
Immediate: Starts right away
Fixed: Same payment
Variable: Can grow (best if concerned with inflation or have high risk tolerance)
Index: Follows index
Accumulation: When it grows
Annuitization: When it pays out
Life: Just your life and it stops
Period Certain: For a number of years
Joint with Survivor: Goes until second death
Refund: Goes for life but refunds if you die early
Pros and Cons of Pure Life Annuities
Pros: Guaranteed income
No residual value for estate tax
Highest payout
Cons: Fixed payment does not grow with inflation can be bad in 20-30 years
Cannot commute the value, cant change your mind and ask for principal back
May die and not get the full value
QLACs
Reduce RMDs by further deferring income. Used in qualified plans.
Annuity loss deduction and taxation for deferred income
Taxation of Early Distributions
If you buy with the intent to make money and lose money on the annuity, then you can liquidate and claim the loss.
If you received as beneficiary probably cant claim loss.
Gain in the annuity is deferred until withdrawals or annuitization.
If a corporation or trust owns the annuity, the gain in a year is taxed in that year to the non-natural person. Loss is counted as ordinary loss.
Annuity and life insurance income is ordinary income.
10% penalty on early withdrawals before 59-1/2 on the earnings only
Group Permanent Life Insurance
Needs to be forfeitable (employee controls it) for employer to deduct premiums and that would be taxable income to employee. Employee needs to name beneficiary.
Dependent Coverage in Group Life
Can cover spouse and dependents up to $2k of death benefit tax free. Anymore than that and you pay premium.
Group term life tax implications
First $50k if tax free. More than that you are taxed on the amount as income based on the Table 1 cost of the insurance.
Premium is deductible by employer.
Discriminatory group life plans
Group life plans are discriminatory toward Key-Employees if they are favored as to eligibility to participate or to amount and type of benefits.
If this is the case then key employees lose the $50k tax free on the first. Everything is taxed on the greater of the Table 1 rate or the normal rate. Employer deducts premiums regardless.
Non key employees still get the $50k tax free.
Group Term Life Assignment
Employer owns the policy but the employee names beneficiary.
For that reason the DB is included in the employees estate.
If the employee transfers all rights of assignment (all incidents of ownership including right to change beneficiary, right to convert the policy, and right to terminate) then it will be out their estate after 3 years.
Group life convertability
Employee can convert the group life without proof of insurability into permanent life (not term) if at or under the current face amount.
Carve-out plan
Employer separates the highly compensated employees to give them a choice of different policies to keep the rest of the employees on the same level field.
Options for the carved employees:
Section 162 plan
Split Dollar Plan
Death Benefit Only plan
Section 162 Health Plan
Employee owns the policy and names beneficiary. Employer pays premiums through a bonus that it deductible to employer and taxable income to employee.
Group disability highlights
Simpler underwriting
Less expensive
Shorter wait times
Short term can pay out fast with very liberal definition up to 52 weeks
Long term is own for a couple years then modified any and usually capped at 50% or $5k
Weekly benefits for own are very limited
INCOME Tax
Employer premiums are deductible to them.
SS Disability Coverage with Other Policies
Can buy private disability to increase amount of coverage.
SS disability pays after a 5 month waiting period (pay starts in the 6th month)
Usually group plans coordinate with SS (not combined so can’t add)
SS usually does not coordinate with private plans (separate and can add together)
Definition for SS Disability: Mental or physical disability resulting in the inability to complete any substantially gainful activity for at least 12 months or to result in death.
Section 125 Cafeteria Plans
Employee can pick and choose between a bunch of benefits.
FSA is part of this plan.
Only retirement plan allowed is the 401(k)
Cash option included
FSA Account (Medical and Dependent Care)
Medical FSA:
- Can choose to either carry forward $640 of the amount OR grace period for 2-1/2 months.
- $3,200 max
- Can be used for most medical expenses except for medical plan premiums (LTC).
- Avoids income and FICA tax.
- Does not cover LTC expenses
- Unused expenses get forfeited back to company
Dependent Care FSA:
- Has to be used by the end of the term period (year end if the plan restarts in the new year).
- Avoids income and FICA tax.
- $5,000 max
- Only allowed if spouse and you both work
- Does not cover LTC expenses
- Unused expenses get forfeited back to company
- Noneligible expenses: tuition, children 13 and older, late payments, overnight camps, transportation
For both: need to provide receipt of expenses for reimbursement which is non-taxable.
Need to elect amount to withhold from salary before the income is earned.
If single person elects to withhold $5,000 then marries non-working person that amount is taxable because both need to work
Can use entire balance at the start of the year and don’t need to repay if you leave the work early
Money left unspent is forfeited back to the employer to be used for more costs or allocated to the employees as income
Voluntary Employees Beneficiary Association
Does not provide deferred comp or pension benefits.
Does provide basic employee benefits.
Dental and Vision Benefits
Both premiums are tax advantaged
Benefits for dental are tax-free, vision are taxable
Exception to not living at home to be covered under a PAP policy?
Being a student.
Three Scenarios where the employer cannot deduct insurance premiums?
- Key-employee insurance
- Split-dollar insurance
- Buy-sell agreements (both cross-purchase and entity-purchase)
The main reason the employer cannot deduct the premiums is because the employer can stand to gain something from it.
Can only convert which group insurance policies?
Group health and group life (life can only go to permanent with no proof of insurability needed but it has to be at or below the same amount of insurance).
Annuity Taxation
Taxed LIFO (earnings taxed first)
If early withdrawal before 59-1/2 then the earnings (not basis) are taxed and subject to 10% penalty
If after 59-1/2 then earnings are taxed but not penalized
If you annuitize the annuity before 59-1/2 then there are no penalties
Taxation of Life Insurance vs MEC
No 10% penalty for normal
10% penalty for MECs
Qualifying as an employee for health insurance
Need 30 hours a week
Variable annuity and life insurance creditor protection
Creditor protected
Spendthrift Clause
Amount they receive is not subject to their creditors.
Beneficiary cannot assign his benefits to debt.
Will a self-insurer typically get enough exposure units for law of large numbers?
NO
Law of large numbers
With a lot of numbers actual results will be closer to expected
Guidelines for Risk Management
High Severity and Low Frequency: Transfer
High Severity and High Frequency: Avoid
Low Severity and Low Frequency: Retain
Low Severity and High Frequency: Retain and Reduce
Principle of Indemnity
Want to be made whole
Insurable Interest
Concept of ACV
Other insurance
Subrogation
Contract Characteristics
Offer and acceptance
Consideration
Legal form
Legal object
Legal capacity (not drunk or children unless for food, clothing, shelter)
Waiver Provision
Neither the agent or insured can alter the contract.
Where is the notice of loss found?
Conditions section
What size company would use a stop-loss to partially self-ensure its medical insurance?
Relatively small companies would use this
100 employees
Capital Retention Approach for Life Insurance Needs
Divide the income needed by the interest rate
$36,000 / .03 = $1,200,000
$1,200,000 + $36,000 for the first year (since interest takes a year to accumulate) so total need is $1,236,000
If there is an inflation number given, then ONLY subtract the growth by inflation
If growth is 7% and inflation is 4% then the percentage to use is 3%
Which risks should be retained?
All but high severity risks
When do you theoretically have to work until to secure health insurance?
63.5 because you can take COBRA from then to 65 and then medicare
Participating vs Nonparticipating Policies
Participating pay out dividends from excess premiums and are usually held by mutual insurance companies (policy owner owned)
- They do not always pay however, only when there is excess but they do overcharge
Nonparticipating do not, earnings are given to stockholders so these are usually stock insurance companies
Choosing insurance company
Want one of the three highest ratings from at least 3 companies
Best Insurance Rating
AM Best
Underwriting
Cover a large number of homogenous exposure units so there is a reasonable equity between better and poorer insureds
Sources for underwriter
Application
Info from agent
Investigations
Information bureaus
Physical exams
What do you want to look at when comparing two different policies?
Cost-benefit analysis
Is land excluded from Coverage A in HO
Yes so if the entire home is bought for $500k but the land is $100k, the dwelling is $400k
Personal property limits
Personal property is covered anywhere in the world, not just at home
Smaller limits for things like jewelry, watercraft, silverware (theft), or money
Coverage D loss of use details
Covers additional living expenses
So if normal payments are $2k and now they are $4k, only $2k will be paid
If you have $50k of C coverage and have a fire and also have $5k in a rented room with $5k of the renters property what is the coverage amount
$45k because $50k-$5k of your rented room property, the renters stuff is never included to begin with
Medical Payments coverage
Covered in small amounts for persons other than the insured
NOT liability coverage
Best choice for HO policies
OPEN
Different Types of HO Policies
HO-1: basic
HO-2: broad
HO-3: open (but broad for coverage C)
HO-4: renters (no A or B coverage and broad for C and D (30%))
HO-5: open (same as HO-3 -15)
HO-6: condo (condo association covers structure but small amount for A and B along with small loss assessment coverage and 50% of D and open for C)
HO-7: mobile homes
HO-8: old homes (basic)
How to protect small stuff that is easily stolen
Personal property endorsement (floater) and policy’s are written on an agreed-value basis
ACV
Replacement cost less depreciation
Usually used for normal stuff but not homes
When amount of insurance on a home is less than 80%
company pays greater of ACV or replacement cost (less deductible)
How to value a building if it asks for ACV
Then take the replacement cost of the building and take out the depreciation, that is your ACV, that is how much the insurance company pays
ACV does not look at how much you should have they will go up to your limit
Are new autos protected under current policy
Yes, but only A, B, and C
D to get that you need to notify the insurance company within 14 days
Spouse insurance policies if moving out
If not residents together anymore, they are covered until the earliest of:
- end of 90 days
- new policy start
- old policy end
very crucial for real life
whoever is the named insured under the policy can keep it but the other has less time
Single vs Split limit for Part A of a PAP
Single covers a certain amount of all claims from one accident
Split covers per person / all bodily injuries / property damage
PAP exclusions
Intentional acts and people who use it without your permission
Part B medical payments for PAP
only applicable for services rendered within 3 years
What does uninsured cover
Bodily injury because of liability not medical payments
Collision coverage and comprehensive
This is anything hitting your car or you hitting something.
Comprehensive is something happening to your car. This also includes hitting a deer or animal.
Key Words
Look at MUST and MAY
what does a securities professional with a branch need in terms of insurance
need BOP, E&O, and personal umbrella for non-business exposures
Personal articles floater
best for someone whose HO policy won’t cover the item, or need beyond HO limits
For property that moves around like cameras, jewelry
when to recommend umbrella?
ALWAYS
commercial umbrella
excludes E&O, malpractice, or mistake of a professional
premium is deductible
workers comp
absolute liability
can be liability without fault
professional liability
E&O (property damage or intangible property like money like for CFP or attorney)
Malpractice (bodily injury like dentist)
Directors and officers, can be sued by stockholders or others to protect against mismanagement
if the B coverage is not enough for HO what can you do?
increase the B percentage
assuming taxation of disability payments received
assuming that the employer paid them so taxable to employee
unemployment premiums paid by employer
tax deductible
is carelessness excluded in HO policies
no, it would still be covered
how long can kids stay on their parents health insurance coverage?
age 26
COBRA application
If worker gets terminated and elects COBRA and has it for 16 months but then dies, the family can extend for another 20 months
If worker or covered family member is disabled within 60 days of the triggering event then the period of continuation coverage is extended by 11 months.
Loss of dependency (age 26 or marriage) is a reason to extend and so is divorce or becoming eligible for Medicare (for spouse)
if still working vs retired with Part B
Best to hold off on part B while still working but then signing up for it after you are done working, better than paying COBRA if you can take Part B.
Divorce COBRA implications
If a couple gets divorced the kids may still be covered under the existing plan but the spouse gets CORBA election for 36 months
Do part time employees count for the COBRA 20 employees rule?
Yes
Modified any ocupation
Jobs that you would be reasonably qualified to have with your education and experience
Looking back at previous wages for disability
Insurer will not pay if the past two years of income dropped dramatically and you are making more than before
What is not required for a disability policy application
Cash flow statement
Most important provision for LTC
Inflation adjustment because expenses will be increasing
Best LTC policy to choose
Best to do a longer period (6 years) with a relatively higher wait period (180 day) to reduce the premium
Average nursing home stay is 3 years
Can you increase the benefits of an existing disability policy?
No, a new policy would have to be issued.
Can you delete a provision from a policy to make it cheaper?
No.
You can choose a guaranteed renewable policy instead of noncancellable to make it cheaper.
What kind of life insurance policy for someone who is starting to earn good money, has a lot of debt, and is married?
Best answer would probably be level term because over time he can lower the death benefits, cancel, or convert it to a permanent policy.
A level term provides the most flexibility in terms of change
What is the increasing death benefit option?
Option B
Great option for funding buy-sell agreement
First-to-die are great but also…
Variable life is great because of the growth potential. Can use cash value to fund the buy sell if they don’t die when expected
Riders that need to be paid for
Disability waiver of provision, accidental death benefit, and guaranteed insurability all need to be paid for to receive
Conversion provision is a standard provision and does not need to be paid for.
Best insurance for a family that has low assets, with concerns over the family’s needs if he were to die.
Best answer with teenage kids is probably level term insurance in order to provide a stable benefit for a cheaper cost.
Choosing any of the whole life options would be a lot more expensive and it is better to get cheap term and THEN fund the 529 or 401k.
Life insurance questions
Look at time frame of need and kids ages
Universal life policy’s paying the lowest premiums will get more expensive each year
Difference between non-forfeiture options and dividend options
Non-forfeiture:
- Cash
- Reduced paid up whole life
- Paid up term life (extended term)
Dividends:
- Cash
- Interest
- Reduce premium
- Paid up additions
- One year term
Is term insurance usually guaranteed renewable?
YES
Want to stop paying premiums on whole life what are the options?
Nonforfeiture options OR use APL or annuitize the cash value
Does universal life have a guaranteed cash value?
NO
What is not a policy provision, feature, or option?
Insurance rating is not, important but now one of those
Actual cash value of a policy
loan + net cash value
What is the biggest problem at the death of a shareholder if they all had a cross-purchase agreement?
Selling the policies that the deceased shareholder owned to other owners affects the taxation of the death benefits (transfer for value)
Does a 1035 exchange to an annuity give a tax-free payout?
Probably not
Best method of getting $10k from a life insurance policy but keeping the death benefit the same?
Better to take from the paid up addition cash value because then the base of the policy will remain the same.
What is not important to think about when looking at different life insurance policies?
Whether they use agents or brokers (not important) and whether they provide incontestable clauses or suicide clauses (all do)
Does a MEC meet the guideline premium and corridor test or cash value accumulation test?
NO but it does meet the requirements of life insurance.
Which policy of split-dollars are more beneficial to the employee?
Collateral assignment because the employee gets the anything over the premium paid (premium paid gets sent back to employer)
Annuity earnings deferral
Deferred when owned by a human and taxable in the year when owned by a non human entity.
If human owns an annuity for profit and there is a loss, they can sell it and claim the loss.
Questions on annuitizing vs lump sum
Take a look at the after tax lump sum return vs the after tax annuity payments and see which is higher
What is a disadvantage of single life immediate fixed annuity?
You receive a fixed payment that does not increase with inflation.
Annuity that if you die prematurely then the annuity will provide payments at least equal to your investment?
Refund annuity
Are annuity premiums deductible?
Yes if they are paid as a bonus to to the employee and the employee owns the annuity.
Employee and employer contributing towards life insurance, how is it taxed?
Don’t forget first $50k is tax free.
Scott pays $0.20 (on entire amount) on $250k and table cost is $0.43 per month but only $200k is taxable, Scott’s income would be ($86-$50)*12 = $432
0.43200 = $86
0.2250 = $50
Can a company deduct the premium of life insurance if the company is the owner and beneficiary?
NO, cannot deduct the premium if employer is directly or indirectly the beneficiary.
Can a corporation deduct disability premiums?
Yes
Which group plans can be converted?
Only health and life have conversion features.
Can a person use an FSA debit card for expenses?
Yes but need to have receipts, sometimes they do not but that is up to the employer.
Can FSAs be used for LTC or COBRA?
No, but HSAs can be.
Can FSA contributions be made to a HSA?
Yes
Cannot contribute to both HSA and FSA
Can FSA benefits continue under COBRA if a triggering event occurs?
Yes
What happens to an FSA dependent care fund if it is funded and then the guy gets married to a stay-at-home mom?
He loses the remainder. The $5,000 (entire amount) would be taxable and would be lost if claims are not submitted by the required date. Can be forfeited but taxes still owed.
Entire amount (not just remainder) is compensation
What is not allowed in a VEBA?
Deferred comp
How does group LTC differ from individual LTC?
People get more options in amount and duration under an individual policy rather than a group policy.
Underwriting and cost is debatable.
Health FSA vs Dependent Care FSA
Health: $3,200
Dependent: $5,000
Is disability deductible for the employer?
Yes
Limit on total medical expenses covered under a FSA?
$3,200 per year
Can a FSA cover overnight camps or care for people who live elsewhere?
No
How to keep a life insurance policy in place if the policy lapsed?
Submit policy reinstatement form
If you do not believe you need as much life insurance as you currently do
Still want SOME insurance, so look for a smaller policy when converting the group term to a whole life.
MEC distribution rules
LIFO
Can I convert my health policy to an individual plan at any time?
Yes
Can a disabled person select a HIPAA health care option?
Yes
Life insurance death benefit
Don’t forget to look at the dividends buying paid up additions that add to the death benefit.
Cross purchase buy sell agreements
Don’t forget that the other person buys the policy on the other so the first pays the extra premium if the other is unhealthy and rated with a higher premium.
Selling price of a cash value life insurance policy
Does not need to be sold at cash value
Can you be denied coverage because of a pre-existing condition?
No
How long can you stay on parents coverage?
26
What retirement plan can cafeteria plans offer?
401ks
Joe has a plant with 6 employees. He has been offered a contract to make a new construction compound but the long term impact of the company is unknown. It may lead to a substantial financial liability in the future. What would you tell him?
- probability of an adverse event is more important than severity
- he should reject the contract to avoid future loss
- severity of an adverse event is more important than probability
- he should accept the project and not worry
Best answer is that he should reject the contract to avoid the future loss.
You need to advise him on what to do.
Leroy lives in Georgia and had a sinkhole develop in front of his house extending to within 5 feet of his basement but doing no structural damage. The hole cost $6,250 to repair. He has an HO-5 policy, how much will the insurance company cover if the deductible is $250?
$0 because there was no actual damage done to his house.
Louis has a 300/500/50 PAP policy on his car and a flood destroys his car for $75k. Ignoring deductibles, what is the amount covered by his auto policy?
$75,000
Flood is a covered expense.
Harry works for a company with 18 full time and 12 part time. He is full time but does not participate in his employers group health plan and is covered by his wife’s health plan. His wife just got laid off and he found out his company is going to Florida so will shut down. What is true of Harry’s health coverage?
COBRA will not provide coverage because he is not in his employers plan.
Bill is 48 and has a lot of pre-existing conditions. He worked at a steel company for 28 years until he lost his job on Jan 31st. He found a new job and was hired on March 2nd. The plan at the new employer has a one-year waiting period, will this create a problem for him?
- Yes, unless he can get a retirement benefit from the old company that provides health insurance, he will not be covered for the pre-existing condition.
- No, he is covered immediately due to HIPAA
- Yes, he will be covered for the preexisting condition when he is eligible to enter the plan
- Assuming his previous employer had over 20 employees, he should elect COBRA
Assuming his previous employer had over 20 employees, he should elect COBRA.
This will give him coverage from one employer to the next.
Rita slipped on some ice outside her home and fractured her hip. After a long hospital stay she returned home with a walker. The doctor prescribed visiting skilled nursing care and additional rehab support and training in her home. What is this type of treatment covered under Medicare?
- Skilled nursing care
- Hospice care
- Home health services
- Custodial care
This is home health services.
Home health services are limited to reasonable and necessary part-time or intermittent skilled care or continuing need for PT.
Lucy graduated from college and is considering purchasing a $250k 20 year term life policy. She does not have a lot of discretionary cash flow so she wants to keep the premium as low as possible. Which clause should she not include to keep it low?
- Reinstatement clause
- Waiver of premium clause
- Convertibility clause
- Reentry clause
A waiver of premium clause would increase the premium. Removing that clause should decrease her premium.
The other clauses are part of the policy.
Stan has a term life policy, which of the following provisions are include?
- Incontestable provision
- APL provision
- Reinstatement provision
- Conversion provision
The provisions that are included in his policy are the incontestable, reinstatement, and conversion provision.
The APL provision is NOT available for term policies. Only whole life has APL.
Only permanent policies have non-forfeiture options.
John’s company had a fire that caused $5k in damages. How much will the insurance company pay if total property is worth $800k, land is $300k, they require a 90% coinsurance and the insured amount is $405k. They also have a $1,000 deductible.
$500k*90% = $450k.
$405k/$450k = 0.9 * $5,000 = $4,500 - $1,000 = $3,500 covered by the insurance company.
If an employee is hurt on the job, the company’s workers comp will pay for which of the following:
- Medical expenses (only payable for one year from date of injury)
- Disability income
- Vocational rehab
- Death benefits
Disability income, vocational rehab, and death benefits would be all provided.
Medical expenses would also be provided but they would not cease after one year. They would be provided without any limitations on time or amount.
What’s covered under Medicare Part A
In hospital services (60 day deductible, 30 day deductible, 60 day deductible)
Home health services (unlimited)
Partial LTC with skilled nursing care
Hospice
Blood (you pay for first 3 pints)
Excluded from Medicare Part B
Eyes
Mouth
Immunizations
Self administered drugs
Disability Waiver of Premium Rider difference between whole life and universal life
Whole Life: Entire premium is waived
Universal Life and VUL: Can waive just the insurance element so cash value does not grow (cheaper) or have them waive the entire premium so cash value continues
Do paid up additions require more premium?
No, you bought life insurance (paid up) for your entire life that does not need to be paid for because you already paid for it.
Transfer for value exceptions
ICDP
Insured
Corporation (if insured if an owner or officer)
Divorce (to ex)
Partner or partnership
Transfer for value
Selling your policy for cash NOT gifting
DB above basis it taxable
Transfer for value corporation vs partnership
You can sell to the corporation and avoid the transfer for value rule. If you are in a corporation and sell or buy a policy from another owner that will trigger the TFV rule because it was NOT a partner. If it is a corporation it has to be sold to the corporation.
If it is a partnership then it can be sold to the partner or partnership and avoid the TFV rule.
Viatical Settlement for Terminally Ill
If terminally ill you can sell your policy to a viatical company and the gain is completely tax free to you if you are terminally ill (less than 24 months to live).
If they recover the IRS will not retroactively tax the benefit.
Death benefit would not be in your estate but amount not spent would be.
The company that buys it will have to recognize ordinary income on the DB less the basis.
Chronically vs Terminally Ill Accelerated Benefits
Can pay out death benefit portion early if either of these. Terminally ill is completely tax free.
Chronically ill is tax free only if used for qualified LTC expenses.
Life Settlements
Someone who is NOT terminally or chronically ill and over 65.
Basis is tax free
Cash value is ordinary income
Amounts above that is LTCG
Terry is 65 and has a $500k DB policy with $200k in CV and paid $100k into the policy. He sold it for a life settlement for $400k. He would have $100k as ordinary income and $200k as LTCG.
Net cash value $15k
Outstanding loan $30k
Dividends used to reduce premium $10k
Premiums paid $50k
What is her tax situation?
Gross Cash value = 15 + 30 = $45k
basis = 50 - 10 = $40k
$45k - $40k = $5k ordinary income
Cash value = $50k
Premiums paid = $35k
Outstanding loan = $30k
Dividends reducing premium = $15k
What amount do they get and what is taxable?
They will receive $20k ($50k-$30k)
They will have taxable gain, ordinary income of $30k ($50k-$20k)
MEC
Once a MEC, always a MEC
Death benefit still tax free
Single premiums are all MECs
Who is the owner and beneficiary of Key Person policy?
Employer should be owner and beneficiary. Premiums not deductible but benefit tax free.
Does group permanent life policy’s meet the requirements to be treated as group term?
No. Employee will be taxed on premiums if proceeds are payable to beneficiary set by employee. Needs to be a nonforfeitable right to employer to deduct premiums.
Getting taxed on group life
If nondiscriminatory then you are taxed on the table 1 cost. Taxed on the amount over $50k but if you pay then it starts at $0
If discriminatory and you are key employee then you are taxed on the greater of the actual cost or amount determined by table 1
Converting from group life to permanent
Does not require proof of insurability
How to max out your disability coverage
Get individual coverage BEFORE getting group disability coverage. Can get a lot closer to 100% by doing this.
Dependent care FSA qualified and non qualified expenses
Qualified:
- Au pair
- Before and after school stuff
- Care of incapacitated adult
- Childcare at a day camp or nursery school
- Late pick up fees
- Housekeeper who is watching an eligible dependent
- Summer camps
- Activities in lieu of day care like swimming camp or art camp
Available for a dependent who is incapable of caring for themselves.
Non qualified:
- Tuition and fees
- Expenses for kids 13 and older
- Late payment fees
- Overnight camps
- Payment for services not provided yet
- Field trips, clothing or food
- Transport to and from provider
Prepaid legal services
Benefits are taxable to employee and deductible by employer
Group LTC
Not a qualified benefit under cafeteria plan. Premiums can be paid with an HSA in a cafeteria plan however.
Employer provided coverage for qualified LTC services is includible in gross income. FSA coverage is not provided for LTC.
Dental and vision employer provided
Premiums are both deductible but dental benefits are tax free but vision benefits are taxable.
What Medicare coverage do disabled people get?
Medicare part A and B
Who pays when there are two different health policies with Medicare?
Medicare pays second
What types of risks need to be covered first?
High catastrophe risks need to be covered FIRST
Important parts of an insurance document
Declarations are customized
Exclusion are important
Does a change in life insurance change the beneficiary?
No, new owner needs to change beneficiary.
Can both stock and mutual companies offer participating policies?
Yes
COBRA amount of employees
If you have 15 full time and 6 part time do you need to offer COBRA?
No because that is 15+3 = 18 which is under 20
What companies can offer HRAs?
C Corps only into employee account and employer reimburses employee based on expenses. Funds remain the employers. Employee can’t take cash out.
When to do entity purchase?
When there are 4 or more people.
Split Dollar Policies
Collateral source is best for the REALLY IMPORTANT employees/owners
Endorsement is for slightly less important
Medical FSA
Can extend until 3/15 or rollover $640
What does VEBA not have?
Deferred comp
A 16 year old boy has a $1,500 car, what risk exposure technique should the parents use?
Transfer to avoid the risk of liability.
“Notice of loss” requirements are found in which part of the insurance contract?
Conditions section which names the rights and duties of both parties.
When is a life insurance policy in force?
- agent collects premium with application
- insured signs application
- policy is delivered and premium is collected
- policy is issued
Best answer is policy is delivered and premium is collected.
Agent collects premium with application is conditional receipt given you are insurable but not necessarily solid at that point.
Think offer and acceptance ALONG WITH consideration.
Jack, an insurance agent goes to submit an application for a client but finds a missing signature but knows the client is gone on vacation, what should he do?
- Under implied authority he should sign
- He should try to reach the client
- Wait until the client gets back
- Send the application by mail to be signed
Jack should try to reach the client even if he is on vacation. That is the duty of care.
How long will PAP Part B benefits pay?
Up to 3 years
An employee hits someone at work, owner can be liable under what type of liability?
General liability
Need this covered under BOP
Malcom age 62 and his wife want to retire now and travel, what should you tell them?
- They will not get Medicare until 65
- COBRA would only be available for 18 months
- COBRA would be $2k or more a month
- Apply for coverage through a government health exchange
Apply for coverage through a government health exchange would be the best bet. The reason is that they would not have coverage until 65.
Can the insured change on a 1035 exchange?
NO then it will lose its tax deferred status.
Does the reinstatement provision require proof of insurability?
YES it does.
Do Medicare premiums increase if you stay working on your employer plan and don’t take Medicare?
NO they do not. But they would if you were electing COBRA.
Does COBRA cover dental and vision?
YES but does not cover disability.
PQs or partnership qualified LTC insurance policies
These are a state backed Medicaid program where you keep your assets that would’ve made you disallowed for Medicaid.
Who needs LTC?
For the exam all clients need LTC in some way, maybe self insure.
Does guaranteed renewable for term require health test?
No.
Which riders for life insurance do not require proof of insurability?
Guaranteed insurability does not.
Convertibility and renewability for term does not need proof of insurability.
Reinstatement clause requires proof of insurability.
Which riders cost more for life insurance?
Disability waiver of premium - different between whole life and universal.
Accidental death.
Guaranteed insurability.
Disability riders
Partial - usually given
Residual - costs more
SIS - Costs more
Guaranteed insurability - costs more (not sure)
COLA - costs more
Disability waiver of premium - costs more
Noncan and guaranteed renewable are important here too.
What does GIO mean?
Guaranteed insurability option.
New clients walk into your office with a baby. They have done no planning, have limited assets, and have a lot of debt. What should they do first?
- Buy medical insurance
- Buy term insurance
- Establish a 6 month emergency reserve
- Consult an attorney to establish guardianship since they are not married
- Establish a CESA
They should buy medical insurance. With a new baby they need that to cover any unexpected medical events before tackling anything else.
Nothing says they are married so don’t jump to that.
Tom and Helen are married with a lot of assets. Helen’s mom who is 84 needs financial help and assistance to live. Tom and Helen feel that Medicaid is charity, what do you recommend that they do?
- Help Helen’s mom get LTC
- Qualify her for Medicaid
- Invite her to move in with them
- Consult with Helen’s sister before deciding
They should invite her to move in with them. LTC is too expensive at that age, they do not like Medicaid, and your clients are Tom and Helen, not Helen’s sister. Moving in with them is the most simple option.
CFP professional sells a 73 year old a $1M annuity by closing out all his investment accounts. All the 73 year old lives on is his SS payments. The CFP got a nice fee from this as well and justified it by saying this would simplify his decisions and he would get one statement. What conducts have been violated?
- Integrity
- Disclose conflicts of interest
- Professionalism
- Duty of Care
All of these have been violated.
A company owns whole life on its key employees and is considering borrowing the cash value for business reasons. The company must pay the interest on the loans, is it eligible for a business deduction?
Yes, but that is limited to a $50k loan on each policy.
Business can deduct a limited amount of interest paid on contracts covering a key person to the extent that each loan doesn’t exceed $50k.
What is the most important advantage of getting a group disability plan over individual plans?
Biggest advantage is that it is cheaper.
There is simpler underwriting but mainly it is cheaper.
Which type of group coverage is not tax deductible by the employer?
- Group life
- Group disability
- Group legal
- Section 125
Section 125 is not deductible because it is funded solely by the employee.
125 is not group coverage, it is a cafeteria plan.
If spouses cease to be residents the second on the policy is covered until the earliest of:
End of 90 days
Effective date for spouses new policy
End of the policy period
Can someone who is eligible for Medicare contribute to an HSA?
Yes if they are still covered under a HDHP
If they are under Medicare Part A and B then they cannot.
If you stay on your group health plan past 65 Medicare premiums will not increase.
