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CFP > Insurance > Flashcards

Insurance Flashcards

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1
Q

What is a risk

A

A condition where there is a possibility of loss (a situation where exposure to loss exists)

  • starting a business
  • buying real estate
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2
Q

What is a peril?

A

The cause of a loss, or the event that you’re insured against:

  • fire
  • windstorm
  • theft, etc.
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3
Q

What is a hazard?

A

A condition that may create or increase the chance of loss arising from a peril.

  • owning a home on an earthquake fault
  • owning a home by a river
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4
Q

Elements of insurance

A
  1. Large number of homogeneous exposure units
  2. Loss must be definite and measurable
  3. Must be fortuitous or accidental
  4. Must NOT be catastrophic for the insurance company
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5
Q

Methods to avoid or reduce loss

A
  1. Avoidance: do not drive, Do not purchase a home but rent
  2. Diversification: duplication of assets or activities at different locations
  3. Transference: insurance
  4. Retention: voluntary, recognizes that the risks exist and assume losses (deductible, coinsurance)
  5. Reduction: sprinkler system, safety programs
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6
Q

Insurance interest

A

Property and casualty: at inception AND at time of claim

Life: at inception, but need not be at time of claim

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7
Q

Parts of the Insurance Contract

A

Declarations Page: Factual Statements that identify the specific person, property or activity being insured.

Definitions: explanation of key policy terms

Insuring Agreements: Spells out the basic promise of the insurance company

Conditions: Spells out in detail the duties and rights of both parties.

Exclusions: Circumstances when the insurer will NOT pay.

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8
Q

Negligences

A

Attractive Nuisances: swimming pool, vacant lot

Negligence per se: violation of a statute

Strict Liability: Product

Absolute Liability: Workers Comp

Vicarious Liability: Respondeat superior (principal’s liability for their agents)

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9
Q

Defenses

A

Assumption of Risk (skiiing, car racing)

Contributory (jay walking, being drunk)

Comparative (A is 20% negligent, B is 80%)

Last Clear chance (rear end someone when you could have avoided it by swerving, braking in time)

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10
Q

Calculating Life Insurance Needs (Two methods)

A

Capital Utilization: uses annuitization to provide needed income but leaves NO money at the end of the planned period

Capital Needs: Uses interest only, so the original capital is still left at the end of the period (also called Capital Retention or interest only)

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11
Q

Insurance Rating Service/Category (What’s the most comprehensive service)

A
  • AM Best (A++ to F)
  • Standard and Poors uses AAA to CCC
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12
Q

Sections of a Homeowner’s Policy

A

Section I

A - Dwelling and Attached Structures

B - Other structures, separate from dwelling (detached garage, fences, sheds)

C - Contents and Personal Property

D - Loss of Use

Section II

E - Liaiblity

F - Medical Payments

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13
Q

Property Excluded under Personal Property Coverage

A
  1. Animals Birds or Fish
  2. Motorized land vehicles and aircraft
  3. Property of roomers, boarders or other tenants
  4. Property contained in an apartment regularly rented or held of rental to others by the insured (unless specifically endorsed)
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14
Q

Perils Covered (Basic form)

A

The policy lists perils covered (WHARVES/FLT)

  • Windstorm
  • Hail
  • Aircraft
  • Riot
  • Vandalism
  • Vehicles
  • Explosion
  • Smoke
  • Fire
  • Lightning
  • Theft
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15
Q

Perils Covered (Broad Form)

A

All Basic, plus RAF:

  • Rupture of a system
  • Artificially generated electricity
  • Falling objects
  • Freezing of plumbing
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16
Q

Homeowner’s forms of coverage

A

HO-1 (dwelling) - Basic

HO-2 (home) - Broad

HO-3 (home) - Open (except Section C, Broad @ 50% of A)

HO-5 (home) (HO 3-15) - Open

HO-8 (older home) - Basic

HO-4 (renters) - Broad on Section C, D is 30% of C

HO-5 (condo) - A/B - named perils, C Open, D Broad @ 50% of C

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17
Q

Homeowner’s Policy Exclusions

A
  • Earthquake
  • Flood
  • Neglect
  • Intentional Loss
  • Ordinance/Law
  • Power Failure
  • War
  • Nuclear Hazard
  • Sinkhole is a covered peril for the exam
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18
Q

Replacement Cost Coverage

A

Replacement Cost x Coinsurance % = Insurance Required

_Insurance Carried _ x loss - deductible = Amount Paid by Ins.

Insurance Required

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19
Q

Auto Risk Exposures

Requirements for a vehicle to be eligible for:

  • Insurance Serivces Office (ISO)
  • Personal Auto Policy (PAP)
A
  • Be owned by an individual or by a husband and wife living in the same HH
  • Be private passenger auto
  • Not be used as public or livery conveyance
  • Not be rented to others
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20
Q

Auto Insurance Parts

A
  • Part A - liability to third parties
  • Part B - Medical payments
  • Part C - Uninsured/Underinsured motorists
  • Part D - Damage to the covered auto
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21
Q

“Covered Auto” as used under the policy

A
  • Any vehicle shown on the dec 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 dec page
  • Any auto or trailer you do not own while used as a temp substitute for any vehicle decribed herein which is out of normal use because of a breakdown, repair, servicing, loss or destruction
22
Q

Persons Insured under medical payments coverage of the PAP

A
  • 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 person while occupant of the insured’s auto (passengers)
23
Q

Uninsured Motorist Coverage (UM)

A

This agreement promised to pay the amount an injured insured could have collected from the uninsured dirver 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

Special Note: UM is liability protection, NOT medical payments

24
Q

Perils Covered Under “Other than collision”

A
  • Glass breakage
  • Loss caused by:
    • Falling Objects
    • Fire
    • Theft
    • Explosion
    • Earthquake
    • Windstorm
    • Hail
    • Water
    • Flood
    • Riot or civil commotion
    • Contact with birds or animals
25
Q

Umbrella Liability Insurance

A
  • Nearly always a correct answer since it is smart coverage
  • Provides liability coverage (BI/PD) for catasptrophic claims
  • Requires policy owner to carry certain underlying coverage of specified amounts
  • Professional acts are specficially EXCLUDED!
26
Q

Professional Liability

A

**Malpractice - **Bodily Injury (doctors, dentists)

**E&O - **Monetary damages (FAs, lawyers, accountants, insurance agents)

27
Q

Worker’s Comp

A
  • Unlimited medical
  • Diability Income (TAX FREE)
  • Death Benefits
  • Rehabilitation (medical and vocational)
  • Absolute Liability
28
Q

Medicare does NOT cover

A
  • Routine foot care, glasses, hearing aids and dental
  • Emergency care outside the US, except Canada, Mexico and Caribbean
29
Q

Medicare and LTC

A
  • Benefits are limited: pays all of the first 20 days of SKILLED care and everything over a specified amount per day for the next 80 days of SKILLED care (100 dy max)
  • The limited benefit is subject to substantial restrictions:
    • Pays for SKILLED care only
    • Admission to a nursing home must follow within 20 days of the hospital stay of three days or more
    • The patient’s condition must be expected to improve
30
Q

HMO vs PPO

A

**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%
31
Q

COBRA coverage requirements

A

Must have 20 full/part time employees. The option to buy continuation:

Coverage must be offered to: (and what’s the qualifying event)

  • Terminated EEs, dependents up to 18 mo.
    • Voluntary or involuntary termination, change from FT to PT
  • Spouses and other dependents up to 36 mo.
    • EE’s death, divorce, legal sep., or eligibility for Medicare
  • Children of EE’s up to 36 mo.
    • Loss of dependent status (marriage)
    • reaching dependency age limit specified by plan
32
Q

HSA

A
  • Used inconjunction with 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 10% penalty if under 65
33
Q

Definitions of Disability

A
  1. Own Occupation - best for the insured
  2. Modified Any Occupation
  3. Split definition
  4. Any Occupation (SS definition)
  5. Loss of Income
34
Q

Disability Income

Policy Continuation Provisions

A

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

35
Q

Taxation of Disability Policies

A

Taxation of premiums and benefits

The individual owns the contract and pays the premium

  • Premiums are not deductible
  • Benefits are tax free to the EE.

The EE owns the contract and the ER pays the entire premium under a bonus arrangement like section 162 disability insurance.

  • Premiums are deductible by the ER as a bonus
  • Benefits are tax free to the EE.

The EE owns the contract and the ER pays the entire premium under a salary continuation plan (group plan)

  • Premiums are deductible by the ER
  • Benefits are taxable to the EE
36
Q

Permanent Life Insurance

(low risk tolerance)

A
  • Insurance Company controls the investment return
  • Assets part of the general account
  1. Whole Life
  2. Universal Life
37
Q

Permanent Life Insurance

(high risk tolerance)

A
  • Client controls the investment return
  • Assets part of a separate account
  1. Variable Life
  2. Variable Universal Life
38
Q

Dividend Options on Life Insurance

A
  • Cash
  • Reduce Premium
  • Accumulate with interest
  • Paid up additions
  • One-year term / 5th dividend
39
Q

Non-forfeiture options

A
  • Cash
  • Extended Term
  • Paid up, reduced amount
40
Q

Life Insurance Settlement Options

A
  • Cash
  • Pure Life / Single Life
  • Refund
  • Period Certain
  • Specified income / period
  • Interest only
41
Q

Modified Endowment Contract (MEC)

A
  • 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 59 1/2 are also subject to 10% federal penalty (if not disabled)
  • Death benefit is still tax-free
42
Q

MEC grandfather rules

A
  • After June 21, 1988 - it’s a MEC. Before…
  • If death benefit increases by 150k or less and the insured has guaranteed insurability (no proof needed), the policy will NOT lose its grandfathering status as non-MEC
  • If the policy increases by ANY amount and the insured must prove insurability, the policy MAY lose grandfathered status
43
Q

Proceeds taxable due to Transfer for Value

A

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 three main exceptions to this rule are:

  • A sale or transfer to the insured
  • 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
44
Q

1035 Tax-free exchange

A
  • Life > Life (OK)
  • Life > Annuity (OK)
  • Annuity > Annuity (OK)
  • Annuity > Life (NO NO NO!)
45
Q

Buy Sell

Stock Redemption vs Cross Purchase

(cost basis treatment)

A

**Stock Redemption: **No Step up in cost basis

Cross-Purchase: Step up in basis

46
Q

Split Dollar Insurance

(EndoRsement Method vs. Collateral aSSignment Method)

A

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
47
Q

Annuity Taxation

A

Periodic Payouts:

Basis/Payout = Tax-free

Lump Sum payouts

  • LIFO (interest first rule)
  • Ordinary income plus 10% penalty if under 59 1/2
48
Q

Flexible Spending Account (FSA)

A
  • Must be used by March 15th or forfeited to the company (use it or LOSE it)
  • Not subject to income tax, FICA or FUTA
  • Health FSA may not be used to reimburse an EE premiums pay 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.
49
Q

Fringe Benefits

(Tax-Free)

(major ones)

A
  • Health Care Premiums
  • Insurance Premiums on non-discriminatory group life policy up to 50k
  • ER Provided transit passes ($130/mo cap) or parking ($250/mo cap)
  • Occasional overtime meal money, cab fare, theater or sporting event tickets
  • Discounts on services limited to 20% of selling price charged to customers
50
Q

Fringe Benefits

(taxable)

A
  • Health insurance paid for self-employed, partners, and more than 2% owners of an S-corp > 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.

CFP (7 decks)

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