Insurance Flashcards
Homeowners insurance coinsurance formula
[(did have/should have) X loss amount] - deductible
If dwelling is insured for less than 80% of the replacement cost then
The HO policy will pay the greater of:
- the “actual cash value” of the damage (replacement cost-depreciation)
- proportion of loss that is equal to the proportion of insurance maintained as compared to 80% of the replacement cost
If dwelling is insured for 80% or more of the replacement cost then
The policy pays the lesser of:
- actual cost to repair damage/replace building
- stated limit of coverage under the policy
Coinsurance clause
Requirement that the dwelling is insured for at least 80% of the replacement cost value for a partial loss to be paid in full
HO policy parts
A is for address
B is for backyard/barn
C is for crate/crap
D is for damage/destroyed digs
E is for exposure to legal action
F is for funds for others/fractured femur
Open perils
Coverage specifies excluded perils or causes of losses that will not be paid. Everything else is covered.
Named perils
Coverage specifies perils that are covered and everything else is not covered
HO8
Modified coverage for older or historical homes
H06
Unit owners form, condo or co-op owners
HO3
Special form
Better homeowners coverage
Covers contents on a named peril basis
Unless HO 15 endorsement is added (3X5=15)
HO5
Comprehensive form
Best homeowners coverage
Covers contents on an open peril basis
H04
Contents broad form
Tenants/renters (covers contents)
HO2
Broad form
Basic homeowners coverage
Entity purchase agreement
A.k.a. stock redemption plan
Method to completely transfer business interest back to the business using life insurance policies. The business purchases policies on the owners and uses death benefit proceeds to buy back ownership shares upon the death of an owner.
Advantages: preferred solution for business with multiple partners, death benefit passes tax-free to the business, and business pays policy premiums
Disadvantages: no increase in cost basis to surviving owners, surviving owners will have substantially more gains upon the sale of the business due to lack of step up in basis
Cross purchase plan
A method to completely transfer business interest among partners/owners using life insurance
Owners agreed to buy and sell their respective business interest upon either death, disability or retirement
The number of policies required : n (n-1)
Advantages:
Simple solution for business with few owners
Death benefit passes tax free to surviving owner
Increase in basis to surviving owner
Residual disability benefit
Provides reduced monthly indemnity in proportion to the insured loss of income when he or she has returned to work at their own occupation at reduced earnings for example, if income has decreased by 60%, they will receive 60% of the monthly disability insurance benefit
Immediate annuity
Payments begin with one month to one year from the date of purchase
If an annuity was purchased before August 14, 1982 how are withdrawals treated?
FIFO
Is annuitizing a contract an eligible penalty exception?
Yes
Modified endowment contract (MEC)
A cash value life insurance policy that fails the seven pay test and changes the tax treatment for cash distributions while the insured is alive from FIFO to LIFO.
Does the death benefit taxation change with a MEC?
No, the death benefit still transfers tax-free
Is there a penalty for a cash distribution from a MEC policy prior to age 59 1/2?
Yes
What conditions must be met in order to qualify for a viatical settlement?
The insured must meet certain conditions, most notably, being terminally or chronically ill. Terminally ill is expected to result in death within 24 months and chronically ill is unable to perform at least two ADLs for at least 90 days
What conditions must be met in order to qualify for a viatical settlement?
The insured must meet certain conditions, most notably, being terminally or chronically ill. Terminally ill is expected to result in death within 24 months and chronically ill is unable to perform at least two ADLs for at least 90 days
The viatical settlement company must grant a:
15 day cooling off period
Viatical settlement tax consequence to the insured?
Excluded from gross income
If the individual is only chronically ill, then the benefits will only be excluded from income to the extent they are used for long-term care services
Viatic settlement tax consequence to the viatical settlement company
The cash settlement amount paid to the insured, plus any subsequent premiums paid by the company is basis. At the insureds death the amount received in excess of the basis is taxable to the viatical settlement company.
Standard HO-5 policy contents coverage
50% of part A dwelling coverage
Primary goal of a 1035 exchange
Defer the recognition of gain in a policy in which the surrender value exceeds the basis
