Insurance Flashcards
What is Risk?
A condition where there is a possibility of loss (a situation where exposure to loss exists).
Examples: starting a business and buying real estate.
What is Peril?
The cause of a loss, the event insured against:
* Fire
* Windstorm
* Theft
* etc.
What is a Hazard?
A condition that may create or increase the chance of loss arising from a peril.
Examples:
* Owning a home on an earthquake fault
* Owning a home by a river
Examples include owning a home on an earthquake fault and owning a home by a river.
What are the Elements of Insurance?
Characteristics of insurable risk
- Large number of homogeneous exposure units to make losses reasonably predictable
- Loss must be definite and measurable
- Must be fortuitous or accidental
- Must not be catastrophic (for the insurance company)
What are the Methods to Avoid/Reduce Loss?
- Avoidance: Do not drive, Do not purchase a home but rent
- Diversification: Duplication of assets or activities at different locations
- Transference: INSURANCE
- Retention: Voluntary - Recognizes that the risks exist and assume losses (deductible, coinsurance)
- Risk Reduction: Sprinkler system, safety programs
What is Self-insurance?
Formal program of risk returention mostly used by large companies. There is an established fund for future losses
Pros:
* costs are lower for commercial insurance
* Reserves can be invested in ST MM
* Earnings can be used to offset costs of program
Cons:
* Can be exposed to catatrophisc loss
* May pay income taxes on reserves held for future claims at year end
High severity and low frequency
Which risk mgt to use?
Transfer (Insurance)
High severity and high frequency
Which risk mgt to use?
Avoidance
Low severity and high frequency
Which risk mgt to use?
Retention
Low severity and low frequency
Which risk mgt to use?
Retention and Reduction
What is Insurable Interest?
Loss will occur if insured event happens. Used diff depending on ins. type:
* Property and Casualty: At inception and at time of claim
* Life: At inception, but need not be at time of claim.
Principle of Indemnity
Reimburse insured for approximate amount lost without allowing insured to make a profit
Contract Requirements
- Offer > Acceptance > Agreement
- Consideration (usually $)
- Need Legal Capacity: incompetenet, intoxicated adults have no capacity; minors do if adult sign as owner or if for necessities only
- Must be for a lawful purpose
Unilateral Contract
Only one person held liable to a binding promise if contract is broken
usually the insurer
Adhesion
Contract is accepted “as is” or not at all. No changes are made. Courts rule in favor of insured bc of this
Waiver Provision
Agents can’t change contract terms only the pres., vp, sec., etc
Recission
Contract is deemed null from beginning due to frau, misrepresentation, concealment or mutual mistakes as to a material fact
Reformation
Contract fails to express the original intent of the parties and so it can be amended
Collateral Source Rule
Damage amount can’t be lessened from sources other than negligent party
Example: Damages total $100k. Victim gets $20k from insurance. The defendant still needs topay $100k
Aleatory Contract
Contract is an unequal exchange. Insurance contracts are aleatory bc can pay premiums but never receive proceeds from policy vice versa
Subrogation
Insurer takes over the legal rights its insured had over a third party
What are the Parts of the Insurance Contract?
Remember D-dice
2. 1. Declarations Page: Factual Statements that identify the specific person, property or activity being insured.
2. Definitions: Explanation of key policy terms
3. Insuring Agreements: Spells out the basic promise of the insurance company
4. Conditions: Spells out in detail the duties and rights of both parties.
5.** Exclusions**: Circumstances when the insurer will NOT pay.
What are Negligences?
- Attractive Nuisances: Swimming pool, vacant lot
- Negligence per se: Violation of a statute
- ** Strict Liability/Product Liability **: Limited to manufacturers and distributors of products found to be defective
- Absolute Liability: Workers Comp
- Vicarious Liability: Respondeat superior (principal’s liability for their agents).
What are Defenses?
- Assumption of Risk: Doing something knowing the risks (skiing, car racing)
- Contributory: Any negligence on part of injured party (jay walking, being drunk)
- Comparative: Damages proportionate to each parties negligence (A is 20% negligent, B is 80%)
- Last Clear Chance: Defendant had a chance to prevent the accident but fails to do so… contributory negligent victim can recover damages (Rear end someone when you could have avoided it by swerving, braking in time)
What are two methods of Calculating Life Insurance needs?
- Capital Utilization Approach: Uses annuitization to provide needed income but leaves no money at the end of the planned period.
- Capital Needs Approach: Uses interest only, so the original capital is still left at the end of the period (also called Capital Retention or Interest Only).
What are the most comprehensive Insurance Rating Service/Category services?
- A.M. Best: A++ to F
- Standard & Poor: AAA to CCC.
What are Sections of a Homeowner’s Policy and what do they cover?
Section I (Coverage: A B C D)
A (bode) - Dwelling and Attached Structures
B (uilding) - Other structures, separate from dwelling (detached garage, fences, sheds)
C (ontents)- Contents and Personal Property
D (emnity) - Loss of Use (paying inc in living exp to live current std of living. eg. paying for hotel stay)
Section II (Coverage: E F)
E (nemies) - Liability
F (irst aid) - Medical Payments.
What property is excluded under Personal Property Coverage?
- Animals, Birds, or Fish
- Motorized Land Vehicles and Aircraft
- Preoperty of roomers, boarders, and other tenants
- Property contained in an apartment regularly rented or held of rental to others by the insured (unless specifically endorsed).
What are the Basic Form Perils Covered?
The policy lists perils covered: Windstorm, Hail, Aircraft, Riot, Vandalism,Vehicles, Explosion, Smoke, Fire, Lightning, Theft.
Remember: Well, Hell All Rowdy Vince Vandykes Enjoyed Silk French Luxury Ties
Study Hint: Remember: WHARVVES/FLT.
What are open perils
Insurer agrees to pay damage by any peril except those specifcally excluded
What are the Broad Form Perils Covered?
- Rupture of a System
- Artificially Generated Electricity
- Falling Objects
-
Freezing of Plumbing.
Study Hint: Remember Basic plus RAFF.
Homeowner’s Policy Exclusions include:
“OPENN WIF”
* Ordinance/Law
* Power Failure
* Earthquake
* Nuclear Hazard
* Neglect
* War
* Intentional Loss
* Flood
Note: Sinkhole is a covered peril for the exam.
Scheduled Personal property Endorsement
Insures valuable propertyabove coverage limits. Property is appraised and insured for a specific value
What is the formula for Replacement Cost Coverage?
- Replacement Cost x Coinsurance Percentage = Insurance Required
- (Insurance Carried ÷ Insurance Required) x Loss - Deductible = Amount Paid by Insurance.
- Sale price - Land value = Replacement Cost
Usually Commercial 90%, Residential 80%.
Use ACV or Replacement Cost Coverage
- When insured amount < 80% of replacement cost use greater of:
* ACV
* Replacement Cost Coverage - When insured amount > 80% of replacement cost use ACV
Actual Cash Value
Replacement Cost- depreciation - deductible
What are the requirements for a vehicle to be eligible for
* Insurance Services Office (ISO)
* Personal Auto Policy (PAP)
- Be owned by an individual or by a husband and wife living in the same household
- Be private passenger auto*
- Not be used as public or livery conveyance
- Not be rented to others.
What are the Parts of an Auto Insurance Policy? What do they cover?
- Part A - Liability to third parties
- Part B - Medical payments
- Part C - Uninsured/Underinsured motorists
- Part D - Damage to the covered auto.
What is classified as a “Covered Auto” under an Auto Insurance policy?
- Any vehicle shown on the declarations page
- Any of the following which you acquire during the policy period:
- Private Passenger Auto
- Pickup Truck
- Panel Truck or Van
- NO coverage for any of these used in a business (need a commercial policy for that) - Any trailer you own listed on the declarations page
- Any auto or trailer you do not own while used as a temporary substitute for any vehicle described herein which is out of normal use because of a breakdown, repair, servicing, loss or destruction.
If spouse is no longer living in the same household how long will they be covered for
Covered until the earliest of:
* 90 days after cange in residency
* effective date for spouse new policy
* end of policy period
PAP part a Limits
- Single limit: one amount (300k) applies to aggregate of all BI/PD
- Split limits: 100k/300k/50k
* 100k max to an one persion for bodily injury
* 300k max for aggregate bodily injury claims
* 50k max aggregate property damage
excludes intentional accidents or someone using car w/o permission
Who are the Persons Insured under medical payments coverage of the PAP?
- The named insured and any family member who suffers bodily injury caused by accident while occupying covered vehicle
- The named insured and family members who if, while a pedestrian, are struck by any motor vehicle designed for use on public roads or by a trailer
- Other persons while an occupant of the insured’s auto (passengers).
What is Uninsured Motorist Coverage (UM)?
This agreement promises to pay the amount an injured insured could have collected from the uninsured driver if such driver had carried auto liability insurance. The term “covered person” as used under the uninsured motorist coverage of the PAP includes the following:
* The named insured and any family member
* Any other person occupying the insured’s covered auto
* Any person, for damages that person is entitled to recover because of injury to a person described above.
Note: UM is liability protection, NOT medical payments.
What are the perils covered under the “Other Than Collision” Provision of an Auto Policy?
- Glass Breakage
- Loss caused by:
1. Falling Objects
2. Fire
3. Theft
4. Explosion
5. Earthquake
6. Windstorm
7. Hail
8. Water
9. Flood
10. Riot
11. Civil Commotion
12. Contact with Birds or Animals.
Insurer Options for Settling Claims
- Replacement Option: Insurer may repair or replace of line kind or quality
- Abandonment or salvage: insured must surrender ownership to insurance company so total loss can be claimed
- Pair or set: Repair or replace to its value before the loss or pay difference between ACV before loss - ACV after loss
What are the benefits of an Umbrella Liability Insurance?
- Nearly always a correct answer since it is smart coverage
- Provides liability coverage (BI/PD) for catastrophic claims
- Requires policy owner to carry certain underlying coverage of specified amounts
- Professional acts are specifically EXCLUDED!
Umbrella Insurance and Gaps in underlying coverage
If there is a gap in the underlying coverage, the person will eat the gap.
Ex: Auto of 300k but underlying needs to be 500k and there is a million dollar judgement.
* 0-300 home owners will cover it,
* 300-500 you will eat
* 500+ umbrella will eat
What are the two types Professional Liability Insurance and who/what does it cover?
- Malpractice - Bodily Injury (doctors, dentists)
- Errors and Omissions (E&O) - Monetary damages (financial advisors, lawyers, accountants, insurance agents).
Business Owner’s Policy
For small to medium sized business
* includes real property, contents, and liability protection
* Professional liability excluded
* the premium is deductible to the business
What does Worker’s Compensation cover?
Wirkers comp benes are income tax free
* Unlimited Medical Expenses
* Disability Income (TAX FREE) limited
* Death Benefits also a payable to family members
* Rehabilitation (Medical and Vocational)
* Reflects Absolute Liability meaning liability with no fault
* Premium deductible to employer
Medicare Part A Benefits
Needs to be cecked
- Hospital Stays: Limited of 150 days
- 0-60 days: certain deductibe #
- 61-90: diff deductible #
- 91-150 diff deductioble # - 100 days of post hospital extended care in skilled nursing home
- Unlimited # of post-hospital home health services
- Hospice care for terminall ill
- patient pays for 1st 3 pints of blood or donates them. Any additional is paid my Medicaid
Medicare Pt. A
Its free and aka Hospital coverage (4 parts):
1. hospital care
2. care in a nursing home or extended care facility
3. home health services
4. care in a hospice
nusing home benes are limited
Medicare Part B
Has to be paid for but is subsizided. If earn too much you will have to pay IRMA. Known as Doctors and tests
1. ohysicians services
2. home health services
3. diagnositcs tests
4. outpatient services
Patient pas the deductible 80% paid by medicare and no stop loss
Doesn’t cover:
* outpatient drugs
* oral anticancer drugs
* drugs for hospice enrolles
* drugs that cant be self admintsered
Medicare Part D
D for Drugs
Must have Part A and/or B coverage + pay p remium
Medicare does NOT cover…
- Routine foot care, glasses, hearing aids, and dental
- Emergency Care outside the US (some exceptions for Canada, Mexico and Caribbean).
Explain the limitations of Medicare’s Long Term Care coverage.
Skilled nursing home care
Benefits are Limited: Pays all of the first 20 days of SKILLED care and everything over $200 per day for the next 80 days of SKILLED care (100 day max)
The Limited Benefit is Subject to Substantial Restrictions: Pays for SKILLED care only:
* Admission to a nursing home must follow within 30 days of a hospital stay of three days or more
* The patient’s condition must be expected to improve.
What are the COBRA coverage requirements and Qualifying Events?
- Must have 20 Full/Part-Time Employees
- The option to buy Continuation Coverage must be offered to: (Qualifying Event?)
1. Terminated employees/dependents up to 18m:Voluntary or involuntary termination, change from FT to PT
2. Spouses and other dependents up to 36m.:Employee’s death, divorce, legal separation, or eligibility for Medicare
3. Children of Employees up to 36m.:Loss of dependent status (marriage); Reaching dependency age limit specified by plan.
Compare HMO vs PPO
HMO:
* Provider paid monthly fee regardless of services rendered (Capitation)
* Out of Network care not covered at all.
PPO
* Provider paid for actual services rendered
* Out of network partially covered, usually 70%.
What is a Health Savings Account (HSA) and what are its benefits?
- Used in conjunction with High Deductible Health Plan (HDHP)
- Distributions are tax free if used for health care
- Contributions not spent are carried forward and portable
- Unused assets become property of named bene on death
- Distributions for non-medical are ordinary income plus 20% penalty if under 65. After 65 is tax free
- Can be transferred to spouse upon death tax free
- Not usable for LTC premiums
Health Reimbursement Arrangement (HRA)
Only for C Corps
* Employer funded
* reimburses EE for suybstantiated medical expenses up to a max amount per coverage peruid (e.g. can reimbuse for out of pocket costs of an HDHP
What are the Definitions of Disability?
- Own Occupation - Best definition for the insured
- Modified any occupation - Unable to work in any occupation
- Split Definition - Own then modified
- Any Occupation (Social Security definition) - Totally disabled, no substantial gainful activity
- Loss of Income - based on economic loss
What are the Policy Continuation Provisions for Disability Income?
- Noncancellable “Noncan”: Continuous term policy guaranteeing the insured’s right to maintain the policy at the stated premium
- Guaranteed Renewable: Continuous right to maintain the policy, but the insurer may increase the premium by class of insureds.
- Conditionally renewable: Can continue policy past 65 only if insured is an active employee
Presumptive disability
Provide that full benes will be paid if the insured loses his sight hearing, speech, both hands, both feet, or one hand and one foot.
Some policies do not cover all of the losses listed, Some req. loss to be total and permanet while others may cover even temp. loss.
Provisions and Riders for Disability
- Residual benefits rider: Benes are porportional to the amount of income lost and payable for the same duration as the policy’s max bene period
- Partial disability rider: Bene is usually 50% of total disability bene; max pmt period is limited to 3-6m while the insured recuperates
- Disability of waiver of premum provision: May waive premiums if the insured becomes totally disabled for at least 90 days (group policies dont have this)
- Social insurance substitute benefit: Pay extra amount but the moment ss kicks in lowers this bene amount
Taxation of Premiums and Benefits for Disability Policies
- The individual owns the contract and pays the premium: Premiums are not deductible and Benefits are tax free to the employee.
- The employee owns the contract and the employer pays the entire premium under a bonus arrangement like section 162 disability insurance: Premiums are deductible by the employer as a bonus; Benefits are tax free to the employee.
- The employee owns the contract and the employer pays the entire premium under a salary continuation plan (group plan): Premiums are deductible by the employer; Benefits are taxable to the employee.
Remember the hug and slug
tested often
Taxation of Premiums and Benefits for Disability Policies (S corp and partnerships)
Partnership and S Corp
* deduct premiums paid for coverage for a partner or greater than 2% shareholder of an S corporation
* deduction is based on premium cost being included in the taxable income
Live Review: Owner of an s corp… tax free benes
Long Term Care Insurance
- Generally excluded on both group and invidivual medical insurance
- Medicare LTC doesnt cover most LTC needs
Taxation
* W2 EE: Premiums paid and unreimbursed expenses for qualified ltc services are deductible as itemized medical expenses… so subj. to AGI floor of 7.5%
* Self-employed: FOR LTC policy, the premium is deductible on the 1040.
Deduction is subject to dollar amount limitations based on age.
Non-tax qualified LTC (NTQ)
- AKA traditional long term care insurance
- Doc needs to certify patients needs care and the policy will pay
- Premiums are not deductible
Partnership Qualified Long term Care Insurance Policies (PQ)
- Partnership between state, insurance company, and state residents who buy policies
- usually needs to live longer than a number of years to use the policy
- Having a PQ allows insured to apply for Medicaid with asset disregard (aka dollar for dollar) meaning thet can keeps assetst hat woul otherwise be disallowed under Medicaid rules.
Permanent Life Insurance (Low Risk Tolerance)
- Insurance company controls the investment return
- Assets part of the general account
- Whole Life
- Universal Life.
Permanent Life Insurance (High Risk Tolerance)
- Client controls the investment return
- Assets part of a separate account
- Variable Life
- Variable Universal Life.
What are the Dividend Options on Life Insurance?
- Cash
- Reduce Premium: Lowers dividend by premium amount
- Accumulate with Interest: Div put in separate account to accumulate with interest. Interest paid on div. is taxable
- Paid up Additions: Dividend is used to buy addl fully paid up insurance… added to Face value
- One-year Term/5th Dividend.: All or portion of dividend is used to buy 1yr term insurance equal to policys base cash value
Remember: CRAPO.
What are the Nonforfeiture Options of Life Insurance?
Can’t Even Pay
* Cash: 6m delay of dist.
* Extended Term: Uses cash value to extend policy
* Paid Up Reduced Amount. Face amt of policy reduced
What are the Life Insurance Settlement Options?
CPR but Past Saving
* Cash
* Pure Life/Single Life
* Refund
* Period Certain
* Specified Income/Period
* Interest Only
* Joint and survivor
What is a Modified Endowment Contract (MEC)?
- Entered into after June 21, 1988
- Fails to meet the “7-Pay Test” (for the exam, includes ALL single premium policies)
- Distributions/Withdrawals are taxed LIFO (Interest First)
- Distributions under 59½ are also subject to 10% federal penalty tax (if not disabled)
- Death Benefit is still tax-free.
What are the MEC Grandfather Life Insurance rules?
If death benefit increases by $150k or less and the insured has guaranteed insurability (no proof of insurability), the policy will NOT lose its grandfathered (non-MEC) status.
If the policy increases by ANY amount and the insured must prove insurability, the policy MAY lose its grandfathered (non MEC) status.
Life Settlement
- For an insured who is not terminally ill or chronically ill but is over 65 yrs old.
- Taxed at LTCG
Accelerated Benefits Rider
vs.
Viatical Settlements
Accelerated Benefits Rider
* Due to a dreaded disease where you become terminally ill, you withdraw a % of the Face Value of the policy
* Money is Tax-free
* Insured dies… bene receives remainder tax free
Viatical Settlements
* Due to a dreaded disease where you become terminally ill, you sell the policy for a % of the Face Value of the policy
* Money is Tax-free
* Insured dies… Viatical pays ordinary income above its basis
* OI on= Bene amount - (purchase price + premiums paid)
purchase price + premiums paid= tax free amount
When are the proceeds in a Life Insurance policy taxable due to Transfer for Value?
If an interest in a life insurance policy is transferred for valuable consideration (not a gift), the proceeds in the excess of the consideration paid for the policy, combined with any premiums paid by the owner, are taxable as ordinary income (like a viatical).
The main exceptions to this rule are:
* A sale or transfer to the insured (most common)
* A sale or transfer to a partner or partnership in which the insured is a partner
* A corporation in which the insured is a shareholder or officer
* Divorce.
What are the 1035 Tax Free Exchange Rules?
Lindsay Lohan went to LA (Los Angeles) and AA (Alcoholics Anonymous) but not AL (Alabama)
* Life → Life (OK)
* Life → Annuity (OK)
* Annuity → Annuity (OK)
* Annuity → Life (NO WAY!).
Can’t be done if the insured changes
Buy Sell Stock Redemption Vs Cross Purchase
Stock Redemption:
* No Step up in Basis,
* Entity is owner and beneficiary,
* creditors can go after it
* tax free benefit
Cross-Purchase:
* Step up in Basis
* Individual owner is owner and beneficiary
* creditors can’t go after it
* tax free benefit
Life buy-sell
vs.
Disability buy-sell
Entity Purchase
Life buy-sell
* Family gets face value income tax free
* All included in gross estate
Disability buy-sell
* Insured gets Face Value
* Pays CG above basis
In Cross Purchase the only difference from above is
* Remaining owner owns more of the company
* Full step up in basis
Qualified Longevity Annuity Contract (QLAC)
Deferred fixed annuity funded from an IRA or qualified retirement plan to stop client/spouse from outliving retirement savings
Can only have up to $200k adjusted for inflation invested
Split Dollar Insurance Endorsement Method Vs Collateral Assignment Method
Endorsement Method:
* Employer is the owner
* Employee is not a shareowner;
Collateral Assignment Method
* Employee is owner
* Employee is a Shareholder
* Employee assigns the policy.
Explain Annuity Taxation
Periodic Payouts
* Basis / Payout = Tax-free
Lump Sum Payout
* LIFO (Interest First Rule)
* Ordinary income plus 10% penalty if under 59½.
B4 1982… FIFO
Group Life Insurance
- EE not taxed on covg <=50k
- Dependent covg not included in exemption and if covg amt <=2k… tax free (ee pays premium
Covg. Greater than 50k
* Taxable amount = (covg amt - 50k - amt paid) x Table 1 cost
* If discriminatory… no 50k exemption for key EE
* On Form w2… subj to FICA/income taxes
What are the characteristics of a Flexible Spending Account (FSA)?
- Must be used by March 15th or forfeited to the company (use it or LOSE it - Medical Only)
- Med exp have $3200 cap w/ 2.5 month grace period or $640 rollover option
- Dependent Care must be used by 12/31
- Not subject to income tax, FICA or FUTA
- Health FSA may not be used to reimburse employee premiums paid for other health plans (such as MSA, HSA and LTC)
- Expenses for LTC services can NOT be reimbursed under a health FSA, but other medical expenses can be reimbursed.
What are the major Tax Free Fringe Benefits?
- Health Care Premiums
- Insurance Premiums on non-discriminatory group life policy up to $50K
- Company car for working conditions only
- Employer-provided transit passes ($315/month cap) or parking ($315/month cap)
- Occasional overtime meal money, cab fare, theater or sporting event tickets
- Discounts on services limited to 20% of selling price charged to customers.
When are Fringe Benefits taxable?
Health Insurance Premiums paid for self-employed, partners, and more than 2% owners of an S-Corp are Taxable Income.
100% is deductible as an adjustment to income on the FRONT of the 1040. This can include all types of health insurance programs.
