Insurance Flashcards
What is a risk?
A condition with a possibility of a loss.
Ex: Owning a house
What is a Peril?
The cause of a loss.
Ex: Fire/collision/theft/sickness
What is a Hazard?
A condition that may create or increase the chance of loss arising from a peril.
Ex: Building a house in a flood zone.
For an insurance company to assume a risk, it must have the following:
1) Sufficiently large number of homogeneous exposure units
2) Definite and measurable
3) Fortuitous or accidental
4) Must not be catastrophic to the insurance company
Parts of the insurance contract
DEC + Dice
Declarations:
- Factual statements that identity person, property or activity being insured and the parties to the transaction.
Definitions:
- Explains the key policy terms
Insuring agreements:
- Spells out the basic promises of the insurance company
Conditions:
- Spells out in detail the duties and rights of both parties
- Notice of loss requirements
Exclusions:
- Spells out the circumstances when the insured will NOT pay
Life insurance needs analysis: Capital Utilization method
Add up all the items and calculate present value.
Ex: Client wants to cover mortgage payoff ($100k) and kids education ($100k).
Total PV need = $200k
May need to use TVM calculation for an annual income replacement
Life insurance needs analysis: Capital retention/preservation method
Take total need amount / growth %. Then add first years income need amount.
Client wants $100k year and is able to invest funds at 7%.
$100,000 / .07 = $1,428,571. Then add first year $100k.
What is Lloyd’s of London?
An insurance company that specializes in high or unusual risk coverages.
Insurance rating services and their rating categories
1) A.M Best
- Top = A++
2) Standards & Poor’s
- Top = AAA
Underwriting process (5 sources of info)
1) An application for insurance
2) Information from the agent/broker
3) Investigations
4) Information bureaus
5) Physical examinations
Process for loss adjustment
1) Notice of Loss
2) Investigation
3) Proof of loss
4) Payment or denial
Homeowners Declaration Page: Section I coverages - Part A
Dwelling
Homeowners Declaration Page: Section I coverages - Part B
Other structures
Homeowners Declaration Page: Section I coverages - Part C
Personal property
Homeowners Declaration Page: Section I coverages - Part D
Loss of use
Homeowners Declaration Page: Section II coverages - Part E
Personal liability
Homeowners Declaration Page: Section II coverages - Part F
Medical payments
Basic Form Perils
“WHARVES/FLT”
Windstorm
Hail
Aircraft
Riot
Vandalism
Vehicles
Explosion
Smoke
Fire
Lightning
Theft
Broad Form Perils
Everything in basic form + RAFF
Rupture of a system
Artificially generated electricity
Falling object
Freezing of plumbing
Open Form Perils
Includes everything in Basic and Broad + any other peril except for those specifically excluded.
HO-1 Coverage
Dwelling
BASIC for all: Dwelling/other structures/personal prop/loss of use
HO-2 Coverage
Home
BROAD for all: Dwelling/other structures/personal prop/loss of use
HO-3 Coverage
Home
OPEN for:
- 100% of dwelling
- 10% of dwelling amount for other structures
- 30% of dwelling amount for loss of use
BROAD for:
- 50% of dwelling for personal property
HO-5 Coverage
Home
OPEN for all:
- 100% of dwelling
- 10% of dwelling amount for other structures
- 30% of dwelling amount for loss of use
- 50% of dwelling for personal property
HO-8 Coverage
Older home
BASIC for all
HO-4 Coverage
RENTERS (4 letters in RENT)
Broad for Personal property
- 30% of personal property coverage for loss of use
HO-6 Coverage
Condos (6 letters)
Open for personal property
50% of personal property coverage for loss of use
8 general exclusions that apply to all homeowner coverages
“OPEN WIF”
Ordinance of law
Power failure
Earthquake
Neglect or Nuclear hazard
War
Intentional Loss
Flood
When calculating property loss calculations - use what?
(FMV or replacement cost)
Replacement cost (never include raw land)
Property loss calcuation
Calculation #1:
- Replacement cost x coinsurance % = insurance required
Calculation #2:
- ((Insurance carried / Insurance required) x loss ) - deductible = amount pd by insurance co
**Default: Insurance required = 80% replacement cost unless otherwise given.
PAP Coverages: A
Liability
**Remember Auto Liability
PAP Coverages: B
Medical payments
**Remember bodily injury
PAP Coverages: C
Uninsured motorist
**Remember careless!
PAP Coverages: D
Damage to your auto
- Collision loss
- Other than collision loss
**Remember Damage
PAP Eligibility to other people
- Spouse or any person living in the same house
- Any person using your car with your permission
Insurance company must be notified within how many days of buying a new car?
14
Is workers comp taxable?
No and the employer can deduct premium
Medicare pays how much for skilled nursing care?
Days 0-20 = medicare pays 100%
Days 21-100 = patient pays $204/day and medicare pays the rest
Days 101+ = patient pays 100%
HMO vs PPO
HMO = monthly fee is paid to the provider (gatekeeper) & individual receives all medical care for the year. Provider decides when to send patient to a specialist.
PPO = Fee for service basis. No requirement to use specific practitioners.
When do you get 18 months of COBRA
When it is job related
- change to FT/PT
- termination
When do you 36 months of COBRA
When it is not job related
- turns 65
- death
- divorce
HSA maximum
**Will be provided on exam
$4,150 - Ind
$8,300 - Family
**$1,000 catch up for 55+
Noncancelable vs guaranteed renewable
Noncancelable:
- Guarantees that the policy stays in force and premium will not increase
Guaranteed renewable:
- Guarantees that the policy will stay in force IF you are willing to pay for it. Does not guaranteed the premium wont increase.
Taxation of disability insurance if the employees owns the policy and pays the premium?
Tax free benefits. Premiums are not deductible.
Taxation of disability insurance if the employees owns the policy and the employer pays the premium under a bonus (section 162)?
Tax free benefits (because premium cost is included on W2)
Premiums are deductible by employer.
**This is always the case for biz owners!! - tax free benefits/cost is added to income/premiums are deductible
Taxation of disability insurance if the employee owns the policy and the employer pays the premium under a salary continuation?
Taxable benefits.
Premiums are deductible by employer.
Can you use FSA or HSA funds to pay LTC premiums?
FSA = No
HSA = Only for “QUALIFIED” LTC plans.
**Anything that has cash value is not a qualified plan!
Medicaid lookback time period
5 years
**Also ineligible if home equity of over $700k
Will endowment contracts every be a correct answer on the test?
No!
Life insurance contract provisions (no additional premium) - 6
1) Automatic premium loan
2) Grace period
3) Reinstatement clause
4) Misstatement of age clause
5) Incontestable clause (the insurer will not contest the policy after it has been in force for a period of time - usually 2 years)
6) Suicide clause (if within 2 years, the insurer is only liable for a return of premium)
Dividend options
- Cash
- Reduction of premium
- Accumulated with interest
- Purchase pd-up additions
- One year term (5th dividend)
(CRAP-O)
Nonforfeiture options
“Cant Even Pay”
Cash
Extended term
Paid up insurance
Settlement options
Cash
Interest only
Fixed period
Fixed installment
4 life income option
What is the NAIC?
Voluntary association of the insurance administrators from each state. Has no LEGAL power but has influence.
Life insurance illustrations must include:
1) Name of insurer
2) Name and address of producer
3) Name, age, and sex of proposed insured
4) Underwriting and rating classification
5) Initial death benefit
NAIC Watch List
12 financial ratios allow NAIC to keep tabs on insurance companies.
If a company has 4 out of 12 ratios outside the normal - goes on the watch list.
If whole life is surrendered - cash value above basis is taxed how?
Ordinary income
Whole life dividends are taxed how?
Return of unused premiums and are not income taxable
Year that the MEC was created
June, 1988
7 pay test
MEC grandfather rules - 2
Rule #1: Coverage increases by over $150k
Rule #2: Coverage increase by over $50k without proof of insurability
Transfer for value rules
Exception is allowed if policy is transferred to the following:
- To the insured
- To a partnership of the insured
- To a corporation that the insured is a shareholder/officer
- Transfer pursuant to a divorce agreement
**If not, the DB is taxable.
1035 exchange
Life to life = ok
Life to annuity = ok
Annuity to annuity = ok
Annuity to life = no
Split dollar plan: EndoRsement method
EmployeR is the owner
EmployeR pays the premium.
EmployeR retains cash value/premium amount of the policy (refunded at death or surrender)
Employees bene gets balance of the DB
Split dollar plan: Collateral aSSignment
EmployEE is the owner
EmployeR pays the premium
EmployeR retains cash value/premium amount of the policy (refunded at death or surrender)
Employees bene gets balance of the DB
Taxation calculation of an annuity payout
Calculation #1:
- Monthly payment x life expectancy in months = expected return
Calculation #2:
- Investment / Expected Return = exclusion ratio
Taxation of disability benefits
Employer pays 100% and deducts premium
Benefit received is then taxable.
**Under a partially contributory plan, a portion of the premium is paid by the employee so taxation is based on the ratio.
Section 125 cafeteria plan includes what?
- Term life (2x salary)
- Medical insurance
- Short/LT disability
- 401k
**Not LTC
FSA Healthcare limit
$3,200
FSA Dependent care limit
$5,000
**Both spouses must work
**For kids ages 13 and under only or an adult with physical or mental dependency.
Fringe Benefits
(Examples)
Parking: $315/month limit
Discount on services: Limited to 20%
Insurance premiums on life policies up to $50k
VEBA’s include prepaid legal services. Is it taxable to employees?
Yes - taxable as compensation
**And all VEBA benefits:
- Severance
- Disability
- Education
- Childcare
- Medical
- Unemployment
- DB
Paul owns a 12-year property that is worth $339,500. If the property depreciated at a rate of 2.5% per year, what is its original value?
$485,000
Step 1: accumulated depreciation = 6 years x .025 per year = .3
Step 2: original value = $339,500 / (1-.3)
What are the two AMT add back items
SALT (taxes)
Bargain element of ISO’s
