Insurance

Question 1

Homeowners insurance coinsurance formula

Answer 1

[(did have/should have) X loss amount] - deductible

Question 2

If dwelling is insured for less than 80% of the replacement cost then

Answer 2

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

Question 3

If dwelling is insured for 80% or more of the replacement cost then

Answer 3

The policy pays the lesser of:
- actual cost to repair damage/replace building
- stated limit of coverage under the policy

Question 4

Coinsurance clause

Answer 4

Requirement that the dwelling is insured for at least 80% of the replacement cost value for a partial loss to be paid in full

Question 5

HO policy parts

Answer 5

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

Question 6

Open perils

Answer 6

Coverage specifies excluded perils or causes of losses that will not be paid. Everything else is covered.

Question 7

Named perils

Answer 7

Coverage specifies perils that are covered and everything else is not covered

Question 8

HO8

Answer 8

Modified coverage for older or historical homes

Question 9

H06

Answer 9

Unit owners form, condo or co-op owners

Question 10

HO3

Answer 10

Special form
Better homeowners coverage
Covers contents on a named peril basis
Unless HO 15 endorsement is added (3X5=15)

Question 11

HO5

Answer 11

Comprehensive form
Best homeowners coverage
Covers contents on an open peril basis

Question 12

H04

Answer 12

Contents broad form
Tenants/renters (covers contents)

Question 13

HO2

Answer 13

Broad form
Basic homeowners coverage

Question 14

Entity purchase agreement

Answer 14

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

Question 15

Cross purchase plan

Answer 15

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

Question 16

Residual disability benefit

Answer 16

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

Question 17

Immediate annuity

Answer 17

Payments begin with one month to one year from the date of purchase

Question 18

If an annuity was purchased before August 14, 1982 how are withdrawals treated?

Answer 18

FIFO

Question 19

Is annuitizing a contract an eligible penalty exception?

Answer 19

Yes

Question 20

Modified endowment contract (MEC)

Answer 20

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.

Question 21

Does the death benefit taxation change with a MEC?

Answer 21

No, the death benefit still transfers tax-free

Question 22

Is there a penalty for a cash distribution from a MEC policy prior to age 59 1/2?

Answer 22

Yes

Question 23

What conditions must be met in order to qualify for a viatical settlement?

Answer 23

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

Question 24

What conditions must be met in order to qualify for a viatical settlement?

Answer 24

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

Question 25

The viatical settlement company must grant a:

Answer 25

15 day cooling off period

Question 26

Viatical settlement tax consequence to the insured?

Answer 26

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

Question 27

Viatic settlement tax consequence to the viatical settlement company

Answer 27

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.

Question 28

Standard HO-5 policy contents coverage

Answer 28

50% of part A dwelling coverage

Question 29

Primary goal of a 1035 exchange

Answer 29

Defer the recognition of gain in a policy in which the surrender value exceeds the basis