Insurance

Question 1

collateral source rule

Answer 1

you can still sue for negligent party for damages even if insurance paid out

Question 2

Parts of the insurance contract DDICE

Answer 2

Declaration page
Definitions
Insuring agreements
Conditions- duties and rights of parties
Exclusions

Question 3

Homeowners Coverage and %

Answer 3

HO1 ABCD Basic
HO2 ABCD Broad
HO3 A Open, B open 10% (of A), C Broad 50%, D open 30%
HO5 Open 10A, 50A, 30A
HO8 (old) ABCD Basic
HO4 (renter) Broad C, D (30 of C)
HO6 (condoo) some coverage for AB, C open, D Broad 50% of C

Question 4

Does COBRA cover group dental and vision?

Group disability?

Answer 4

Yes, No

Question 5

which insurance premiums are qualified medical expenses for HSA

Answer 5

COBRA, qualified LTC insurance

Question 6

HRA (Health Reimbursement arrangement)

Answer 6

ONLY for C corps

• solely employer-funded
• reimburses medical expenses up to max amount per period
• no OTC drugs

Question 7

Social Insurance Substitute (SIS) benefit- how does it work (disability insurance)

Answer 7

it’s a rider that pays you a certain amount that’s reduced by SS when it starts paying

Question 8

taxation of disability for partnership/S corp owners

Answer 8

premiums paid for greater than 2% owner can be deducted by the partnership/s corp, and the owner gets tax free benefits

Question 9

Non-tax qualified (NTQ)- LTC insurance

Answer 9

“medical necessity” trigger- doc certifies patient needs care, then policy pays
-premiums not deductible

Question 10

Partnership Qualified LTC insurance policy (PQs)

Answer 10

partnership bn state, insurance co and resident- individual can apply for Medicaid with “asset disregard” (or dollar for dollar)- can keep assets that would be disallowed under Medicaid

Question 11

1035 exchange

Answer 11

no annuity to life,

can’t be done if insured changes

Question 12

“what type of life insurance should client get?”

Answer 12

endowment is WRONG answer!

consider risk tolerance

Question 13

waiver of premium (UL/VUL policy)

Answer 13

“waver of premium” or “disability waiver of mortality and admin expenses” benefits pay will pay those for you

for Whole Life, premium is waived, death benefit remains in force (waiver paid with after-tax money, then premium payment is tax-free)

Question 14

Life settlement (not ill, over 65)

life insurance surrender

Answer 14

taxed, LONG TERM CAP GAIN (surrender is usually ordinary with possible penalty, but not here) [look for LTCG answer]

surrender gain above basis is always ORDINARY income

Question 15

“carve-out” plan? (group life)

Answer 15

discriminatory plan, the $50,000 exemption not allowed

I-42 example****
$0.29 x 200 x 12= $696

Question 16

VEBA (Voluntary Employees’ Beneficiary Associations)

Answer 16

funds benefits for members:

death, medical, child care, severance, edu, disability, legal, unemployment

Question 17

life insurance- capital retention approach question

Answer 17

wants the death benefit to produce income at death, how much death benefit needed?

needs $36,000/yr from death benefit. 4% inflation, 7% return–> $36,000/3%=$1,200,000

$1,200,000+$36,000*** (for 1st yr payment)

Question 18

when do you risk turning your policy into MEC?

Answer 18

if you have to add to death benefit ($150,000) and need PROOF OF INSURABILITY (this is what makes it into MEC)….just get a new policy.

if proof of insurability is required, it may become MEC regardless of the amount

Question 19

FSA (Flexible Spending Account or Section 125)

LTC?

experience gain?

Answer 19

it’s a section 125 cafeteria plan- solely funded by employEE

(tax free dependent care limited to $5000, health limited to $2700)

can’t be used to reimburse LTC premiums and expenses

1. No FICA/FUTA
2. No LTC
3. Not HSA
4. Use it or Lose it (dependent care only)

experience gains= forfeitures from FSA used to reduce plan costs for next year, returned to premium payers

Question 20

taxation of life insurance payout- single life pure annuity example

Answer 20

death benefit $100,000, $800/mon for life expectancy of 30 years, how much of the $800 is taxable?

$800 x 12 mon x 30 years= $288,000
($100,000/$288,000) x $800= $278 (not taxed portion)
$800-278=$522 taxed

annuity contribution before 1982 remain FIFO distribution (

Question 21

group life- how much income is charged for benefit? (using Table 1)

conversion?

Answer 21

$500,000 group life coverage (always consider $50,000 exemption, but not for this discriminatory plan), Table 1 rate is $0.15 per $1000 per month

$0.15 x $500 x 12 mon= $900 is charged for this benefit

can convert to individual, any type of permanent (but NOT ANNUITY etc) but don’t exceed the group coverage amount!

Question 22

Homeowners

Sections I and II

Answer 22

Section I:
A Dwelling, B Other, C Personal Property (boat/trailer limited to $1000), D Loss of use

Section II:
E (enemies) Personal Liability, F (First aid) Medical payments

Question 23

joint life annuity vs joint-and-survivor annuity

Answer 23

joint-life: payments case on death of first (no good use……)

Question 24

qualified LTC policies characteristics

Answer 24

HIPAA says:

• must be guaranteed renewable (can be noncancellable)
• tax deduction limited by age
• benefits TF (up to $190)
• can’t be cash value policy (but rider in life policy is ok)

Question 25

Underwriting insurance (5 sources of info used)

Answer 25

1. application for insurance 2. info from agent or broker 3. investigations 4. info bureaus 5. physical exam or inspections to make law of large numbers work, homogeneity- reasonable equity between better and poorer

Question 26

premiums paid for group term life deductible business expense?

Answer 26

always- it can even discriminate in favor of key employees

Question 27

LTC- taxation of premiums and unreimbursed expenses

Answer 27

deductible as itemized medical expenses if qualified- but limitation by age benefits are generally not taxable

Question 28

residual disability definition

Answer 28

Upon returning to work, the insured is unable to earn as much; benefits are proportional to the amount of income lost and are payable for the same duration as total disability benefits.

Question 29

Business Owner's Policy (BOP)

Answer 29

provides liability, property damage, and medical payment coverage. umbrella only takes effect after the limits of the BOP are exhausted. doesn't cover professional acts

Question 30

Human life value method (life insurance)

Answer 30

based on income-earning ability- PV of income lost by dependents resulting from the death (doesn't take into account other resources)

Question 31

MEC

Answer 31

- after june 21, 1988 - doesn't meet 7-pay (all single premium policies are mec) - distributions taxed LIFO - under 59.5 10% penalty - death benefit TF -meets req of life insurance contract meets cash value accumulation test/guideline premium and corridor test

Question 32

comprehensive major medical coverage calc

Answer 32

$500 ded/ 3 max ($1500) 80%/20% next $5000 coinsurance/100% thereafter claims: $9000, $8000, $10,000, $7000 best way: $1500 ded + $4000 ( 20% coinsurance of $5000 x 4 ppl)= $5500 (what YOU pay) subtract from total claim($34000- $5500= $28,500 what insurance pays)

Question 33

HIPAA

Answer 33

- designed to reduce "job lock" | - can move from old plan to new employer's plan without meeting pre-exiting req

Question 34

professional liability covered by?

Answer 34

ONLY by Errors and Omissions personal umbrella, commercial umbrella, BOP all have exclusions for pro liability

Question 35

Business Overhead Expense (BOE) covers, exclusion, benefits

Answer 35

BOE can pay for pro liability policy premium (normal business expense) salary excluded premiums are not deductible but benefits are tax free

Question 36

participating policies

Answer 36

they don't ALWAYS have to pay dividends larger premiums charged, but if not needed, returned as dividend (generally TF)

Question 37

life insurance conversion- what's allowed?

Answer 37

you can only exchange term for permanent!

Question 38

mortality table?

Answer 38

Extended term option (nonforfeiture) puts the company at more risk, so they're permitted to use higher mortality tables (adverse risk)

Question 39

annuity held by non-natural person (like corporation or certain trust)- taxation

Answer 39

income must be treated as ordinary income (to the corporation holding it) (also, if income is ordinary income, loss is also ordinary loss)

Question 40

HSA (health savings account)- qualified expenses (distributions not taxed) think "medical IRA"- it's a savings account

Answer 40

``` doctor visits not covered by insurance rx (no non-rx) acupuncture eye exam hearing test dental physical therapy abuse treatment diabetic LTC expenses vitamins ``` ENROLLMENT in Medicare disqualifies HSA!(not mere eligibility)

Question 41

when calculating medical insurance payout-

Answer 41

subtract deductible first, then apply coinsurance (20% for 80/20) to the NEXT amount up to stop loss, etc don't forget the deductible if the question is asking you how much YOU paid

Question 42

annuity that always produces highest payout

Answer 42

life annuity (aka pure life annuity, straight life annuity)

Question 43

COBRA (in case of divorce)

Answer 43

wife covered 36 mon, child isn't limited to 36! still covered normally as his daughter

Question 44

Medicare coverage parts A and B Medicare Part B premium deduction

Answer 44

A: Hospital Insurance - hospital stays - post hospital skilled nursing home up to 100 days - post-hospital home services - hospice care for terminal - patients pay for first 3 pints of blood *days 1-60- medicare pays all except flat deductible, then co-pay B: Medical Insurance (Dr and tests) - doctor's services: office visits, house call, nursing home - diagnostic tests, radiology, drugs administered by doc, physical therapy - outpatient - home health services - free preventive care like mammograms - depression screening, alcohol misuse, obesity * Part B* - itemized Schedule A deduction exceeding 10% of AGI - SE can do above-the-line deduction

Question 45

Homeowners Coverage C: personal property

Answer 45

Coverage C- anywhere in the world. typical limits: - $1000 for watercraft - $1000 for jewelry and furs - $2500 for silverware (theft only) - $200 for money/bullion

Question 46

worker's compensation insurance- what's covered and not

Answer 46

sick-leave not covered! disability, rehab, survivor's death benefit, medical expense (unlimited) covered

Question 47

insurance pays greater of ACV or replacement cost | see live review I-11 to 12

Answer 47

ACV: $36,000 (loss (damage) on roof) x 50% (depreciation-given) less deductible replacement cost- you know it watch out for FLOOD (not covered)

Question 48

Medicare coverage calculation example

Answer 48

110 days in skilled care- $370.50/day, Medicare specified coverage amount is $170.50/day. (=means YOU pay $170.50) how much did Medicare pay? Medicare covers first 20 days in full @$370.50 and daily charge exceeding $170.50 for 80 days ($200) add. Don’t confuse extended care and ltc

Question 49

viatical settlement (terminal illness)

Answer 49

death benefit $500,000; viatical settlement company buys for $325,000 and pays $32,000 of premium before person dies dying person gets $325k tax free viatical company's basis is $325k + $32k= $357k, so it gets ordinary taxed on $500k-$357k=$143k

Question 50

subrogation

Answer 50

ex: insurance pays insured for loss, but makes a claim against the person who caused the loss

Question 51

aleatory contract

Answer 51

amount of dollars unequal (insured may pay lots of premium and not get anything if nothing happens, and insurer may end up paying a lot after little premium paid)

Question 52

"attempt to cope with inflation" or "keep up with market conditions" for suitability question for annuity or life insurance-->

Answer 52

variable product (annuity or life) is usually correct choice for exam

Question 53

fringe benefits (tax free) | taxable

Answer 53

- employer paid heath plan premium - group life premium paid by employer (up to $50,000) - qualifying day care paid by employer (limited) - company car - transit passes ($265/mon cap) - employer provided parking ($265) - occasional meal, cab, tickets - discounts not exceeding profit percentage - discounts limited to 20% of what customer pays (taxable) - self employed health premium (but deductible on front of 1040) - group life paid by employer exceeding $50,000 (nondiscriminatory)

Question 54

transfer for value (life insurance death benefit taxation)

Answer 54

income tax exclusion NOT lost for: - transfer to insured - transfer to partner of the insured (PARTNERSHIP) - transfer to corporation in which insured is a shareholder/officer

Question 55

fringe benefits (tax free)

Answer 55

- employer paid heath plan premium - group life premium paid by employer (up to $50,000) - qualifying day care paid by employer (limited) - company car - transit passes ($265/mon cap) - employer provided parking ($265) - occasional meal, cab, tickets - discounts not exceeding profit percentage - discounts limited to 20% of what customer pays

Question 56

taxable employer provided plans

Answer 56

- prepaid legal plan paid for by ER - individual disability plan paid for by ER - group disability paid for by ER

Question 57

LTC premium deduction by age (W2 AND SE)

Answer 57

Age 51-60 $1580/ | Age 610-70 $4220/yr

Question 58

insurance premiums made up of?

Answer 58

premium made up of: 1. pure insurance cost (cost for insurance co), 2. cash value (permanent)

Question 59

Respondeat superior

Answer 59

Vicarious liability

Question 60

Corporate paid insurance premiums- deductible and not deductible

Answer 60

``` Deductible- Business owners Workers compensation Futa D&O ``` Not deductible- key man life insurance

Question 61

Surrender of life policy (w loans and dividends reducing premiums)

Answer 61

$50,000 DB $30,000 loans $40,000 of premiums paid , reduced by $10,000 dividends Cash value is $15,000 net of loan Cv$15k+ $30k loan= $45k total cv Minus $30k premiums paid= $15k ordinary income

Question 62

Discriminatory group term life insurance- first $50k excludable?

Answer 62

Key employee can’t deduct but non-key employees can

Question 63

What benefits can be offered under the cafeteria plan? Cash benefits Group term life Nonqualified deferred comp Accident and health benefits

Answer 63

Nonqualified deferred compensation cannot

Question 64

selling life insurance-

Answer 64

ex: employer sells policy to employee's children- - selling price is greater of cash value or premiums paid - income taxable to the kids under transfer for value - income taxable to employer if sold for more than premiums paid

Question 65

group policy conversion

Answer 65

group health-> individual (not good and expensive, better than nothing) group life-> into permanent, not term group disability-> not convertible

Question 66

life insurance death benefit amount

Answer 66

don't forget paid-up additions...

Question 67

can a company borrow from the cash value of life policies on key employees and deduct the interest?

Answer 67

yes, but limited to $50,000 loan on each policy

Question 68

compensatory structured settlement

Answer 68

does NOT cease at death. PV of unsatisfied payments included in gross estate