Insurance Flashcards
What is Risk?
A condition where there is a probability of a loss
(Ex: Starting a Business, Buying Real Estate)
Peril
The cause of a loss, the event insured against
(Ex: Fire, Windstorm, theft, ect.)
What is a Hazard?
A condition that may increase or create the chance of a loss
* Ex 1: Owning a home on an earthquake fault
* Ex 2: Owning a home by a river
What are the Elements of Insurance
- Loss is accidental, definite, measurable, and repeatable
- Loss is not catastrophic (for the insurance company)
What are the Methods to Avoid/Reduce Loss?
THINK – DARRT! (Random DARRT hurts)
* Diversification: Duplication of assets or activities at different locations (Buy different stocks)
* Avoidance: Simply avoid the risk. (Do not drive, Do not purchase a home, but rent)
* Retention: Understand risk exists and assume losses (Deductible, Co-insurance)
* Risk Reduction: Identify and take steps to reduce likelihood of damage or loss (Sprinkler system)
* Transference: INSURANCE
What is Insurable Interest?
Financial stake in a person, property, or event. Need insurable interest to purchase insurance.
* Property and Casualty: At inception and at time of claim.
* Life: At inception, but need not be at the time of claim.
What are the parts of the Insurance Contract?
THINK – DDICE
* Declarations Page: Identify specific person, property, or activity being insured
* Definitions: Explains key policy terms
* Insuring Agreements: Basic promise of insurance company
* Conditions: Details the duties and rights of both parties
* Exclusions: Circumstance when the insurer will NOT pay
What are Negligences?
THINK – Avoid Negligences; SAV
Attractive Nuisances: Dangerous condition that can attract children (Swimming Pool, Vacant Lot)
Negligence per se: Violation of law or regulation
Strict Liability/Product Liability: Responsible even if business wasn’t careless or intended to harm – still allows for defences
Absolute Liability: Responsible even if business took all reasonable precautions (Worker comp.)
Vicarious Liability: Supervisors responsible for actions of employee/third party (Principal’s liability for agent)
What are Defences? (Negligence)
DEFEND YOUR ACCL
Assumption of Risk: Voluntary acceptance of risk from activity (Skiing, Football, Car racing)
Contributory: Injured was also negligent is causing the harm (Jay Walking, Being Drunk)
Comparative: Injured was partial at fault (A is 20% negligent, B is 80% negligent)
Last Clear Chance: Injured had last opportunity to avoid harm even if negligence put them in the position (Rear end when could have swerved, Braking on bike, Hitting Jaywalker)
What are two methods of calculating Life Insurance needs?
Capital Utilization Approach: Assumes all money used over the planned period. Breaks money into a series of periodic income payments (annuitization).
Capital Needs Approach: Calculates needs for income, assets, expenses and uses interest payments. The original capital is left at the end of the period (Capital Retention or Interest Only)
What are the most comprehensive Insurance Rating/Categories Service?
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:
* Section A: Attached Structures and Dwelling
* Section B: Other Structures, separate from dwelling (detached garage, fences, sheds)
* Section C: Personal Property and Contents
* Section D: Loss of Use
Section 2:
* Section E: Liability
* Section F: Medical Payments
What property is excluded under personal property coverage?
THINK AMPP
* Animals, Birds, Fish
* Motorized Land Vehicles & Aircraft
* Property of other tenants
* Property in apartment regularly rented (unless specifically endorsed)
What are the Basic Form Perils Covered (Home Insurance)?
THINK – WHARVVES/FLT
* Windstorm
* Hail
* Aircraft
* Riot
* Vandalism
* Vehicles
* Explosion
* Smoke
* Fire
* Lightning
* Theft
What are the Broad Form Perils Covered (Home Insurance)?
THINK – RAFF
* Rupture of a System
* Artificially Generated Electricity
* Falling Objects
* Freezing or Plumbing
Homeowner’s policy Exclusions Include?
THINK – OPENN WIF
* Ordinance/Law
* Power Failure
* Earthquake
* Nuclear Hazard
* Neglect
* War
* Intentional Loss
* Flood
* NOTE: Sinkhole COVERED
What is the formula for Replacement Cost Coverage?
- Insurance Required: Replacement Cost x Co-insurance
- Amount Paid by Insurance (Co-Insurance Clause): (Did/Should) x Loss - Deductible (Usually Residential - 80%, Commercial - 90%)
Requirements for vehicles to be eligible for Insurance Services Office (ISO) and Personal Auto Policy (PAP)?
- Owned by individual or husband/wife living in same household
- Vehicle primarily used for personal transportation (driving to work, running errands)
- NOT used to transport people or goods for fee (Taxi, rideshare, delivery vehicle)
- NOT be rented to others
What are the Parts of an Auto Insurance Policy?
THINK LMUD
Part A: Liabilities to Third Parties (100/300/50 → 100K per person/300K total for bodily injuries/50K for property damage in an accident)
Part B: Medical Payments
Part C: Uninsured/Underinsured motorists
Part D: Damage to the Covered Auto
What is classified as “Covered Auto” under Auto Insurance Policy?
- Vehicle on declarations page
- Vehicle acquire during policy period (Private Passenger Auto, Pickup Truck, Panel Truck or Van) → Must notify insurance provider
- Vehicle used as temporary substitute for covered vehicle out of service due to breakdown, repair, loss, or destruction
- NO COVERAGE – any auto used in Business (Need Commercial Policy)
Who are Persons Insured under Medical Payments Coverage of a Personal Auto Policy (PAP)?
- Named insured, family members, and Passengers injured by accident in covered vehicle
- Named insured and family member injured as pedestrian struck by vehicle on public roads
What are the Perils covered under the “Other Than Collision” Provision of Auto Policy
THINK –G-CHEEFFFWWTR
* Glass Breakage
Loss Caused By:
* Contact with Birds or Animals
* Hail
* Explosion
* Earthquake
* Falling Objects
* Fire
* Flood
* Water
* Windstorm
* Theft
* Riot or Civil Commotion
What are the Benefits of Umbrella Liability Insurance?
- Liability Coverage for other’s Bodily Injury/Property Damage (BI/PD)
- Requires policy owner to carry underlying coverage (Umbrella Kicks in After)
- Smart coverage (Cheap for big coverage)
- Professional acts, business liability specifically EXCLUDED
What are the Two Types of 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)
What does Worker’s Compensation cover?
THINK – URADD
* Unlimited Medical Expenses
* Rehabilitation (Medical & Vocational)
* Absolute Liability
* Disability Insurance (TAX FREE)
* Death Benefits
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
Benefits are Limited: Pays all the first 20 days of SKILLED nursing and everything over specific amount (194.50) per day for next 80 days SKILLED care
Limited Benefit Restrictions: Pays for SKILLED nursing:
* Admission to nursing home must be within 20 days of hospital stay of 3 days or more
* Patients condition must be expected to improve
Compare HMO vs. PPO:
HMO: Health Maintenance Organzation
* Provider paid monthly fee regardless of services rendered (Capitation)
* Out of Network care NOT covered
PPO: Preferred Provider Organzation
* Provider paid for actual services rendered
* Out of network partially covered, usually 70%
What are COBRA coverage requirements and Qualifying Events?
- Must have 20 Full/Part-Time Employees
- The Option to Buy Continuation
- Coverage ends if employee doesn’t pay premiums and cost can be up to 102% of cost
Coverage Qualifying Events:
* Employee Termination, Reduction of Hours, Loss of Pay, or Enrollment to Medicare (18 months) - excludes gross misconduct
* Lost Spouse Coverage (36 months) → Employee death, Divorce, or Enrollment to Medicare
* Lost Dependency Status (36 months) → Turn 26 or Married
What is an HSA (Health Savings Account) and what are its benefits?
- Used with High Deductible Health Plan (HDHP) → $1600 (2024)
- Contribution Cap ($4150/single → $8300/family)
- Deposits are tax-deductible, growth is tax-deferred, spending tax-free
- Balance carried forward (can be invested)
- On death, becomes property of beneficiary
- Distributions for non-med are ordinary income plus 20% penalty if under 65
What are Definitions of Disability?
Own Occupation: Pays if unable to perform main duties of job (BEST FOR INSURED)
Split Definition: Starts Own then Any
Any Occupation: Unable to work in any job qualified for (Social Security definition; some policies have less strict “any” than SS)
What are the Policy Continuation Provisions for Disability Insurance?
Noncancellable “Noncan”: Continuous term policy guarantees right to maintain policy at stated premium
Guaranteed Renewable: Continuous term policy, but insurer may increase premium by class of insured
Taxation of Premiums and Benefits for Disability Policies
Individual owns Contract and pays the Premiums:
* Premiums are not deductible
* Benefits are tax-free
Employee owns Contract and employer pays entire Premium under bonus arrangement like section 162:
* Premiums are deductible by employer as bonus
* Benefits are tax-free to employee
Employee owns contract and employer pay entire Premium under Salary Continuation (Group Plan):
* Premiums are deductible by employer
* Benefits are taxable to employee
Permanent Life Insurance (Low Risk Tolerance)
- Insurance Company Controls Investment return
- Assets part of General Account
- Whole Life/Universal Life
Permanent Life Insurance (High Risk Tolerance)
- Client Controls Investment return
- Assets part of Separate Account
- Variable Life/Variable Universal Life
Dividend Options on Life Insurance
THINK – CRAPO
Returned of Unused Premiums (Not Taxable Not Guaranteed)
* Cash
* Reduce Future Premiums
* Accumulate additional gains (Sits in separate account where gain Taxable)
* Paid up Additions (Purchase Single Premium Whole life Policy-Increase Cash and Death Benefit)
* One-Year Term / 5th Dividend (Purchase one year term Policy)
Nonforfeiture Options of Life Insurance
End Policy and Pay Small Surrender Charge
* Extended Term (Default Option) → (Take Value and start New Term Policy)
* Cash (Pay Income Tax if Value > Premiums)
* Reduced Paid Up (Take Value and start New Permanent Policy you don’t pay premiums on)
Life Insurance Settlement Options
Options to Pay Death Benefit to Beneficiary (Can’t change after Selection). Gains above Death Benefit ALWAYS Taxable to Beneficiary
- Cash (Not Taxable)
- Life Income (Fixed payouts for life for beneficiary based on life expectancy)
- Life Income Period Certain (Fixed Payouts for Life with guaranteed period)
- Interest Only (Only interest paid until another option is selected)
- Fixed Period (Total Amount over Fixed Period)
- Fixed Amounts (Specific Amount)
- Joint and Survivor (Payout between two beneficiaries who receive set amount even if other dies)
- Term Life / Permanent Life (With Single Large Payment)
- Refund
What are 1035 Tax Free Exchange Rules
- Life → Life (OK)
- Life → Annuity (OK)
- Annuity →Annuity (OK)
- Annuity → Life (NO WAY!!)
What is Modified Endowment Contract (MEC)?
- Entered in after June 21st, 1988
- Fails to meet “7-Pay Test” (For exam, includes ALL single premium policies)
- Distributions/Withdrawals Taxed LIFO (Interest First)
- Distributions <59½ subject to 10% federal penalty tax (if not disabled)
- Death Benefit still tax free
MEC Grandfather Life Insurance Rules?
- Death Benefit increases <=150K + guaranteed insurability, NOT lose grandfathered (NON-MEC).
- Death Benefit increases by ANY amount + must prove insurability, MAY lose grandfathered (NON-MEC) status.
When are proceeds in Life Insurance taxable due to transfer for value?
Pay Income Tax if Value > Premiums when transferred for money (not a gift) to a party other than:
* A sale or transfer to the insured
* A sale or transfer to a partner or partnership
* A corporation in which insured is shareholder or officer
* Divorce
Buy Sell Stock Redemption
When shareholder sells shares back to corporation
* Remaining Shareholders do not get step up in basis;
* Entity is owner and beneficiary.
Cross-Purchase Stock Redemption
When shareholders sell shares back to other stockholders
* Remaining Shareholders get step up in basis;
* Individual owner is owner and beneficiary.
Split Dollar Insurance Endorsement Method
- Employer is owner
- Employee is not a shareholder
Split Dollar Insurance: Collateral Assignment Method
Valuable fridge benefit for Key Employees involving Costs and Benefits of Permanent Life Insurance
* Employee is owner
* Employee is shareholder
* Employee assigns the policy to Employer
What are the characteristics of a Flexible Spending Account (FSA)?
- Max Contribution of $3200 (2024)
- Must be used by March 15th
- Dependent used by 12/31
- Not subject to income tax, FICA, or FUTA
- Health FSA cannot reimburse employee premiums paid for other health plans (MSA, HSA, LTC)
- Expenses for LTC cannot be reimbursed under FSA
What are the major Tax Free Fringe Benefits?
THINK – HIDECO
* Health Care Premiums
* Insurance Premiums on non-discriminatory group life policy up to 50K
* Discount on services limited to 20% of selling price charged to customers
* Employee-provided transit passes (315/month) or parking (315/month)
* Company car for working conditions only
* Occasional overtime meals, cabs, theater, or sports
When are Fringe Benefits Taxable?
Health Insurance Premiums paid for self-employed, partner, and >=2% owner of S-corp are taxable income
* 100% is deductible as an adjustment to income on FRONT of 1040
* This can include all types of health insurance programs
Types of Permanent Life Insurance
Whole Life: Premiums don’t change and cash value grows at fixed rate
Universal Life: Premiums can vary and cash value grows based on market interest rates
Variable Life: Premiums can vary and cash value grows based on performance of investments
