Insurance Flashcards
Insurance is used to protect what?
Pure Risk
What is Pure Risk?
Either financial loss or no loss
What is Speculative Risk?
There is a chance of profit, loss, or no loss
What is Subjective Risk?
Risks that are based on the perception of risk
What is Objective Risk?
Risks that are measurable, not based on perception
What is the Law of Large Numbers?
When more units are exposed to similar loss, the predictability of that loss increases
What is a Peril?
The cause of the loss: fire, wind, tornado, etc
What is a Hazard?
Conditions that increase the likelihood of loss
What are the Three Types of Hazards?
- Moral
- Morale
- Physical
What is a Moral Hazard?
A character flaw, e.g. filing a false claim
What is Morale Hazard?
Indifference created by being insured, e.g. Carelessly leaving the keys in the ignition because it’s insured
What is Physical Hazard?
A tangible condition that increases likelihood of loss, e.g. icy or wet roads
What is Adverse Selection?
The tendency for someone with higher risks to purchase or renew policies
How is Adverse Selection Managed?
Through underwriting, denying on front end, & raising premiums on the back end
Requisites for an Insurable Risk are…
CHAD Catastrophic (must not be for insurer) Homogenous (law of large numbers) Accidental Determinable (must be measurable to forecast losses
Requisites for a legal contract are…
COALL Competent parties Offer and Acceptance Legal consideration Lawful purposes
What is the Principle of Indemnity?
The insured cannot make a profit and can only be compensated for their loss
What is Subrogation?
The insured cannot receive compensation from both their insurer and a third party for the same claim
What is the difference between void and voidable?
A void contract never came into existence because it was never legal
A voidable contract is valid, but allows cancellation by one party but not the other
What is Representation in Insurance?
Statements made by the insured to the insurer during the application process
Is lying about age a material misrepresentation?
No, the insurer will adjust the benefit to reflect the real age rather than voiding the contract
What is Adhesion in Insurance?
A policy is “take it or leave it” w/out negotiations. So ambiguities are usually in favor of the insured
What does Aleatory mean in Insurance?
The money exchanged is unequal
How is Insurance Unilateral?
Only the insurer is obligated to pay if there is a loss, the insured is not required to pay premiums
What is Estoppel?
When one party is denied assertion of a right to which they are otherwise entitled
What is a Waiver Provision?
An insurer will avoid liability from loss when an agent changes the contract w/out permission from the company
What is the Parole Evidence Rule?
The written contract must represent the prior understanding of both parties
What is Reformation in Insurance?
A contractual remedy to express the original intent of all parties
What is Rescission in Insurance?
Deems a contract void from inception
Who does a General Agent Represent?
A single insurer
Who does an Independent Agent Represent?
Multiple unrelated insurers
Who does an Insurance Broker Represent?
The policy owner, not the insurer
What is Express Authority?
Authority given through an agency or written agreement
What is Implied Authority?
Authority the public perceives
What is Apparent Authority?
When the insured believes the agent has authority, but in fact doesn’t
What are Conditions in an Insurance Policy?
Details the duties and rights of the insurer and insured
What are Exclusions in an Insurance Policy?
Specifically what is not covered, whether it is a certain peril, condition, or item being excluded
What are Riders and Endorsements?
Written additions to contract
Who makes the State Insurance Laws?
The Legislature, not the commissioner
What are the Three Main Goals of State Insurance Regulation?
- Protect the Insured
- Maintain & promote competition
- Maintain solvency of insurers
What is Replacement Cost?
The amount it would take to replace the property with new materials of like kind
What is Actual Cash Value?
Replacement cost, minus depreciation
What is Agreed Upon Value used for?
Art and Antiques
What are S&P & Moody’s Highest Ratings?
S&P= AAA Moody's= Aaa
What are S&P & Moody’s Lowest Ratings?
S&P= CC Moody's= Caa
What Regulatory Powers does the NAIC have?
None, only States have regulatory powers
When Should you use Risk Avoidance?
For the most serious types of risk
When Should you use Risk Retention & Reduction?
When financial risk is low & frequency is high
When Should you use Risk Transfer?
When financial risk is high & frequency is low
Name the Two Ways to Determine Insurance Needs
- Needs Approach
2. Human Value Approach
What is the Needs Approach to Determining Insurance Amounts?
Evaluating the value of all the various needs in the present and future
What is the Human Value Approach to Determining Insurance Amounts?
Projecting one’s future income minus self maintanance
What are the Three Provisions of Term Life Insurance?
- Renewable (without evidence of insurability)
- Convertible (into a whole life for a period)
- Waiver of Premium (If disabled for a period)
What is an Annual Renewable Term (ART) Policy?
Premiums start at the lowest and increase each year
What is a Level Term Policy?
Premiums remain level for the term of the contract
What is a Decreasing Term Policy?
Premiums remain level, but the benefit decreases over the term of contract (good for mortgages)
What is an Ordinary Life Policy?
Premiums are paid till death or 100
Cash value increases to face value at 100
Death benefit is level throughout term
What is a Limited Pay Life Policy?
Premiums are paid until a certain age, but they are higher than Ordinary Life
What is a Variable Life Policy?
When cash value is invested
Death benefit & cash values fluctuate throughout the term based on investments
What does Participating Mean in a Whole Life Policy?
The policy pays dividends
What Five Options Can a Participating Policy Pay Dividends?
CRAPO
- Cash
- Reduce Premiums
- Accumulate at Interest
- Paid-Up Additions
- One Year Term
What are the Nonforfeiture Options?
Cash surrender value
Reduced paid up insurance
Extended term insurance
What is the Cash Surrender Value?
When terminating the policy, the cash value minus the surrender charges
What Must Life Expectancy be to Receive Accelerated Death Benefits?
24 months or less
Is Income from ADB taxable?
No
What if the Insured Commits Suicide?
Benefit is excluded if within 1 or 2 years of purchasing, but premiums would be returned
How does Disability Waiver of Premium Differ Between Whole Life and Universal Life?
Whole Life= waivers whole premium
Universal Life= waivers mortality and admin or entire premium
Universal A vs Universal B
Universal A benefit = The greater of either the face value or cash value
Universal B benefit = both the face value and cash value
What is a Modified Endowment Contract?
When you over fund your cash value beyond IRS limits in the first 7 years, then withdrawals are taxed at LIFO (Earnings first)
Premiums for Insurance Policies are Deductible for who?
Employers paying for an employees policy
Group Term Policies Premiums Paid for by an Employer counts as income to the Employee after how much coverage?
$50,000
What is an Installment Refund Annuity
If total payments to annuitant are less than what her paid by his death, then the balance is paid to his beneficiaries
Are Death Benefits Taxed?
No, except for when transferred for value
How are Dividends Taxed in a Life Policy?
They aren’t taxed until withdrawn, and are tax free if withdrawn at death
When is an Exchange a Taxable Event?
Only when exchanging an annuity for a life policy
How are Withdrawals Taxed?
Withdrawals are considered a return of basis, so no tax until basis is fully distributed and earnings are taxed as ordinary income
Taxation of Interest Only Distributions Prior to Death?
Interest payments are taxed as ordinary income
Taxation of Installment Payments Prior to Death?
A portion is return of basis, another portion is earnings and are taxed as ordinary income
How is the Taxable Portion of an Installment or Annuity Payment Figured?
Exclusion/Inclusion Ration: Divide basis by total lifetime payments to find the exclusion amount, the rest is taxable
What if Insured Dies Before Cost Basis is Recovered from Installment or Annuity Payments?
The balance can be deducted on his final return as a misc. itemized deduction NOT subject to the 2% rule
Withdrawals from an Annuity Prior to Annuitization result in What Type of Tax Treatment?
Prior to my 1st birthday = FIFO
After my 1st birthday = LIFO
What are the Minimum Deductibles for an HDHP?
Individual = $1,200 Family = $2,400
What are the Maximum Contribution Limits for an HDHP?
Individual = $3,100
Family = $6,250
$1,000 catch up for those older than 55
What are the Penalties for Non-Qualified Expense Distributions from an HSA?
Income tax on entire distribution plus 20% penalty before 65, not 59 1/2. After 65, non-qualified expenses are just subject to income tax
How is Employer Provided Health Insurance Taxed?
Non taxable to the employee
Who is Eligible for Medicare?
Anyone 65 or older receiving Social Security, or any age and receiving SS Disability for 2 years
How is Medicare Part A Paid For?
Social Security Tax
What Does Medicare Part A Cover?
Hospital, skilled nursing, home health care, and hospice
What is the Deductible for Medicare Part A?
$1,156 per benefit period
What are the Copays for Medicare Part A?
Days 1-60 = $0 (covered by deductible)
Days 61-90 = $289 per day
Days 91-150 = $578 per day
What is the Copay for Medicare Part A for Skilled Nursing Facilities?
Days 1-20 = $0 (covered by deductible)
Days 21-100 = $144.50 per day
What is the Copay for Medicare Part A for Medical Equipment?
20%
Are Custodial Care Services Covered Under Medicare Part A?
No
What are the Premiums for Medicare Part B?
$96.40 per month
Premiums will be higher for:
Singles with income > $85,000
Married with Income > $170,000
What is Covered Under Medicare Part B?
Doctors services, ambulance transportation, diagnostic tests, outpatient therapy, home health care
What is the Deductible and Copay for Medicare Part B?
Deductible = $140 per year Copay = 20%
What Specifically are Not Covered Under Medicare Part B?
Routine physical exams dental care cosmetic surgery hearing aids eye exams
What is the Cost of COBRA?
Up to 102% for employee because employer can charge 2% for admin fees
What Employers Must Provide COBRA?
Employers with 20 or more full time employees
How Long Must an Employer Provide Coverage Under COBRA?
18 months for voluntary or involuntary termination or reduced hours.
36 months for all other reasons
How Long Does an Employee have to Elect COBRA?
60 days
When Can COBRA Coverage be Terminated Before the Term Ends?
- When Employer Terminates the health plan for all employees
- When employee stops paying premiums
- When employee becomes covered by another plan
What are the Six ADLs?
- Eating
- Bathing
- Dressing
- Tranferring
- Toileting
- Continence
What are the 7 Types of Care Covered by an LTC Policy?
- Skilled Nursing
- Intermediate Nursing
- Custodial Care
- Home Health Care
- Assisted Living
- Adult Day Care
- Hospice Care
How is the Tax Treatment for LTC Premiums and Benefits?
Premiums are deductible to a point
Benefits are tax free if LTC plan is qualified
What is a “Qualified” LTC plan?
Must need care for at least 90 days, unable to perform 2 or more of the 6 ADLs, a person suffers from cognitive impairment
Disability Benefit is Short Term if Last…
Two year or less
How are Disability Benefits Taxed?
If premium paid by employee, premiums are not deductible but benefits are tax free
If Employer pays premiums, premiums are deductible to the employer and benefits are taxed to the employee
What are residual Benefits in Disability?
If the employee goes back to work for less pay, the insurer pays the difference
The Basic Named Perils are…
VVV WEATHR FS Vehicles Vandalism Volcano Windstorm Explosion Theft Hail Riot Fire Smoke
The Broad Named Perils are…
SWADe FF Sudden bursting of appliances Weight of ice, snow, sleet Accidental overflow of water Damage from electrical current Falling objects Freezing of system or appliance
What is Open Perils Coverage?
Protects against all perils except specifically excluded perils
Which 7 Perils are Typically Excluded?
- Movement of ground
- Ordinance or law
- Damage from water
- War or nuclear hazard
- Power failure
- Intentional act
- Neglect
What is Home Owner Insurance Coverage A?
Dwelling:
Covers repairs or replacement of house and attached structures
What is Home Owner Insurance Coverage B and What is its Limit?
Other Structures:
Garage or storage
Limit is 10% of coverage A (not covered if used for business)
What is Home Owner Insurance Coverage C and What is its Limit?
Personal Property:
Furniture, clothes, electronics, art, etc.
Limit is 50% of coverage A
Will Home Owner Insurance Coverage C cover property that is destroyed while it is outside of the home?
Yes, anywhere the property is, it is covered
What is Home Owner Insurance Coverage D and What is its Limit?
Loss of Use:
Loss is either additional living expenses or loss of rent income
Limit is 20% of coverage A
What is Home Owner Insurance Coverage E and how much is the minimum?
Personal Liability:
Covers both damages and cost of defense for bodily injury or property damage
Minimum coverage of $100k per occurrence
What is Home Owner Insurance Coverage F?
Medical Payments to Others:
Medical payments regardless of fault
The injured had to have permission to be at the insured location
The insured injures another while away from the insured location
An animal owned by the insured injured the person away from the insured location
Name the Years where the SS FRA begins to increase and how much per year
1938 & 1955. Each year adds 2 months to the FRA
How much are SS Benefits Reduced for Early Withdrawal?
5/9 of 1% for each month up to 36 months, then 5/12 of 1%
How much SS Benefits Do you get if taken 3 years early?
80%
How much SS Benefits Do you get if taken 4 years early?
75%
How much SS Benefits Do you get if taken 5 years early?
70%
What is the Dollar Amount for a SS Quarter?
$1,160
What is the SS Wage Cap?
$110,100
What are the Wage Thresholds for the New Medicare Additional 0.9% Tax on Wages?
Married = $250,000
Married filing separately = $125,000
Single, head of house, & widow = $200,000
A Worker 31 & Over is Covered for Disability if…
Fully insured and earned 20 quarters in the last 40 quarters
A Worker Between 24 & 30 is Covered for Disability if…
Earned half of quarters available since age 21 to disability
A Worker Between 21 & 24 is Covered for Disability if…
Earned 6 quarters in the last 12 quarters
What is Currently Insured?
Earned at least 6 quarters in the last 12 quarters
Who is Eligible for Survivorship Benefits?
A child under 18 & A spouse with a child under 16 (The worker must be fully or currently insured)
How much is Your SS Benefit Reduced for Working While Taking SS?
Early Retirement = $1 for every $2 earned above $15,120
The year you reach FRA = $1 for every $3 above $38,880
Are SS Benefits Taxable?
Federally, up to 85% depending on MAGI (AGI, nontaxable interest, foreign income)
How Much Coinsurance is Required for Home Owners Insurance Coverage A?
80% of replacement cost
What Amount Will an Insurer Pay on Coverage A of a Homeowners Insurance Policy?
The greater of:
Actual cash value
((Ins. Face value / coinsurance) x Loss) - deductible
