Insurance

Question 1

What are the four principles supporting indemnity?

Answer 1

1) Insurable Interest
2) Actual cash value
3) Other insurance (limit the ability to profit from a loss)
4) Subrogation

Question 2

What is the concept of adhesion?

Answer 2

The contract is accepted “as is” or not at all. It is not a regulated contract.

Question 3

What does it mean to be aleatory?

Answer 3

With insurance, the amount of dollars given up is typically unequal.

Question 4

What is the collateral source rule?

Answer 4

The plaintiff’s measure of damage should not be mitigated by payments received from sources other than the negligent party/tortfeasor.

Question 5

What is superannuation?

Answer 5

The risk that someone sill outlive his or her money.

Question 6

What are the two methods to determine life insurance needs?

Answer 6

1) Capital utilization - leave no money at the end of the anticipated distribution period (calculate the present value of a future need).
2) Capital retention or capital preservation - presumes that only interest is distributed. The original capital is still left at the end of the income period. (When the question does not provide a number of years, it is probably a capital retention question.)

Question 7

When you have the income number that is needed and the interest rate, how do you calculate the principal needed to generate that income amount?

Answer 7

Income Needed / Interest Rate

$30,000 / 5% = $600,000

Question 8

How much disability insurance can someone get?

Answer 8

Typically only 50% - 60% of earned income.

Question 9

What rating company provides detailed, historical data on insurance carriers?

Answer 9

A.M. Best

Question 10

What is Open Form coverage on a homeowner’s policy?

Answer 10

The insurer agrees to pay for damage by any peril except those specifically excluded. Usually the right answer because it covers unusual risks that are not named under the Basic and Broad forms.

Question 11

When the amount of insurance is less than 80% of the dwelling’s replacement cost, what will the insurer pay?

Answer 11

The GREATER of:

1) Actual Cash Value (ACV); or
2) (Insurance carried / Insurance required) x Loss, then subtract the deductible.

Question 12

If the amount of insurance is equal to or greater than 80% of the replacement cost, what will the insurer pay?

Answer 12

The insurer will pay the replacement cost.

Question 13

What must be done for a newly acquired automobile to be considered a covered auto under Part D?

Answer 13

Insurance company must be notified within 14 days of acquisition.

Question 14

Who is covered under Part A of an auto policy?

Answer 14

1) Named insured and spouse (if living in same household). If spouses stop living together, then covered until the earliest of: a) 90 days following that change; b) the effective date of the spouse’s own policy; c) the end of the policy period.
2) A family member living in the same household
3) Any person using the car with your permission

Question 15

What medical expenses are covered under an auto policy?

Answer 15

Only those expenses for medical services rendered within 3 years of the date of an accident.

Question 16

Who is covered under Part B of an auto policy?

Answer 16

1) Insured, Spouse, and any family member occupying the car or when struck as a pedestrian by a vehicle;
2) Any other person injured while occupying a covered auto.

Question 17

What types of loss does Uninsured Motorist Coverage apply to?

Answer 17

Those resulting from bodily injury including medical expenses; lost wages and pain and suffering. (Does not include punitive or exemplary damages.)

Question 18

Are workers’ compensation benefits taxed?

Answer 18

No, even though the employer can deduct the premium cost.

Question 19

Who can receive SS disability?

Answer 19

1) Disabled workers at any age;
2) Disabled widows (of workers) age 50 or over;
3) Beneficiaries age 18 or older who receive benefits because of disability beginning before age 22; and
4) Disabled qualified railroad retirement annuitants.

Question 20

What are the limits to SS Part A (hospital stays)?

Answer 20

Hospital stays are subject to a deductible for the first 60 days; then a second deductible for the next 30 days and a third deductible for another 60 days. Inpatient care is limited to 150 days for one stay.

Question 21

What are limits to SS Part B (doctor’s visits)?

Answer 21

Patient pays a deductible then Medicare pays 80% of the balance of approved charges. (Patient is liable for 20% of an unlimited amount.)

Question 22

Are health insurance premiums paid by an employer for employee or employee’s dependents considered income for purposes of W-2?

Answer 22

No.

Question 23

What employers are subject to COBRA?

Answer 23

Employers with 20 or more employees on more than 50% of its typical business days in the previous calendar year.

Question 24

What is the COBRA time for a disability qualifying event?

Answer 24

29 months

Question 25

What is the maximum annual contribution to an HSA

Answer 25

$3,500 for a single person / $7,000 for a family

Question 26

What is the penalty for a nonmedical HSA withdrawal?

Answer 26

20% of the distribution if under age 65

Question 27

What is an HRA?

Answer 27

A Health Reimbursement Arrangement that is solely employer funded and reimburses employees for out-of-pocket costs of an HDHP. It can not be part of a cafeteria plan because it may not be used for salary reductions.

Question 28

What is better disability coverage? Own occupation coverage or Any occupation coverage?

Answer 28

Own occupation. Total disability is defined as being unable to engage in his or her own occupation.

Question 29

What is the SS definition of disability?

Answer 29

The inability to engage in any substantial gainful activity by reason of any medically determined physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

Question 30

What is the taxation of disability benefits?

Answer 30

1) If individual owns the contract and pays the premium:
Premiums are not deductible & benefits tax-free
2) If employee owns policy but gets bonus to pay premium (Section 162 disability insurance):
Premiums are deductible by employer and benefits are tax-free to employee because premiums were included in W2 income.
3) If employee owns the contract and the employer pays the entire premium under a salary continuation plan (Group Plan):
Premiums are deductible by employer and benefits are taxable to employee. (With shared premiums, benefits will be partially tax-free.)
4) Partnership and S-Corp:
Premiums can be deducted for partner or greater than 2% shareholder if premium cost is included in taxable income as conduit income. Proceeds are then excluded from taxable income.

Question 31

What is 162?

Answer 31

A bonus

Question 32

What is the taxation of LTC policy premiums and benefits?

Answer 32

1) Premiums paid and unreimbursed expenses for qualified LTC services are deductible as itemized expenses but subject to an additional dollar amount limitation that increases with age of the insured individual.
2) Benefits received are generally not taxable subject to dollar caps.
3) A policy that provides cash at surrender is not qualified. But a “qualified” LTC policy can be part of a life insurance policy as a rider.

Question 33

What is the Medicare coverage for LTC

Answer 33

1) Must need skilled nursing care with expectation of improvement.
2) First 20 days paid in full (after hospitalization)
3) Days 21 - 100 a co-payment is required (insured pays $170.50/day)
4) After day 100, patient pays in full

Question 34

What are two methods of calculating life insurance?

Answer 34

1) Needs analysis estimate survivor’s needs and compares those needs to the resources available.
2) Human life value is based on individual’s income earning ability and does not take into account other resources available.

Question 35

What are the standard life insurance contract provisions?

Answer 35

1) Automatic premium loan
2) Grace period
3) Incontestable clause
4) Reinstatement clause
5) Misstatement of age clause
6) Suicide clause

Question 36

What are the standard life insurance riders?

Answer 36

1) Disability waiver of premium
2) Guaranteed purchase option
3) Accidental death

Question 37

What are dividend options on a life insurance policy?

Answer 37

1) Cash
2) Accumulated with interest
3) Purchase paid-up additions
4) One-year term insurance (5th dividend)

Question 38

What are nonforfeiture options on a life insurance policy?

These options make up the table that is applied per $1,000 of fact amount

Answer 38

1) Cash option
2) Reduced amount - face amount will be reduced to the amount the cash value would purchase as a single premium.
3) Paid up term - the policy will be continued in force for as long as the cash value will permit.

Question 39

What are settlement options of a life insurance policy?

Answer 39

1) Cash option
2) Interest Option
3) Installments for a fixed period
4) Installments of a fixed amount
5) Life income

Question 40

What is the tax treatment of a life settlement?

Answer 40

1) Amount of premiums paid are tax-free- the basis
2) Ordinary income from basis to cash surrender value
3) LTG from the higher of either the cash surrender value (or the basis) to the net settlement proceeds.

Question 41

What is the tax treatment of a MEC?

Answer 41

1) Withdrawals and loans are LIFO plus 591/2 penalty

2) Death benefits are still tax-free

Question 42

A life insurance contract that passes the 7-pay test can become a MEC if there is a material change in the policy. What is considered a material change?

Answer 42

1) If the death benefit increases by more than $150k
2) If the death benefit is increased at all (or an additional qualified benefit is purchased) and the ownder did not need to show evidence of insurability.

Question 43

What three transfers will not create a transfer for value problem? (If deemed transfer for value, income tax exclusion is lost.)

Answer 43

1) Transfer to the insured
2) Transfer to a partner of the insured
3) Transfer to a corp in which insured is a shareholder or an officer

Question 44

What is the tax treatment of key employee life insurance? (Employer is the owner and the beneficiary.)

Answer 44

1) Premiums are nondeductible

2) Death benefits are received tax free

Question 45

What is the tax treatment of Split Dollar life insurance policies?

Answer 45

FIND OUT

Question 46

What is the tax treatment of Business Overhead Expense insurance

Answer 46

1) Sole proprietors can deduct premiums.

2) C and S Corporations cannot deduct premiums.

Question 47

What is the benefit to employees of a group life insurance policy?

Answer 47

The employee is not taxed on premiums paid by the employer if the coverage does not exceed $50k. If it does, employee is taxed on the cost of coverage over $50k minus the amount he paid. Amount he is taxed is included on W2.

Question 48

What are the four tests for group life insurance?

Answer 48

1) Death benefit excludable from gross income
2) Provided to a group of employees as compensation
3) Policy must be carried by employer
4) Amount of insurance must be computed under a formula.

Question 49

What happens if a group life plan is discriminatory?

Answer 49

Each key employee must include the greater of the actual cost of insurance or the cost determined from Table 1 in his income.
The non-key employees retain the $50k exclusion (of the cost from their income) even if discriminatory.

Question 50

Can an employer deduct the cost of premiums on a group life insurance plan?

Answer 50

1) Term - premiums are generally deductible.

2) Permanent - only if the employee’s right is nonforfeitable.

Question 51

What is a Section 162 Bonus Plan

Answer 51

Employee owns life insurance policy.
Employer pays premium and employee is W2 as bonus income on the cost of those premiums (phantom income).
Premiums are deductible to the employer.

Question 52

What is the typical definition of total disability in a group disability plan?

Answer 52

2-5 years of own occupation and thereafter modified any occupation

Question 53

What are the income tax implications of a group disability plan?

Answer 53

Generally, employer pays 100% of premium and can deduct the premium.
Disability benefits are considered taxable income to the employee.

Question 54

Do group disability plans integrate with Social Security?

Answer 54

Generally, yes they do.

Question 55

How long is the waiting period for SS benefits?

Answer 55

Five months - they are payable at the beginning of the sixth full calendar month of disability.

Question 56

What is a Section 125 Cafeteria Plan?

Answer 56

A plan that allows employees to choose the form of benefits they want. They must include a cash option to receive cash instead.
**LTC insurance is not a qualified benefit under a cafeteria plan.

Question 57

Rules of a Health FSA

Answer 57

1) Salary reductions are not subject to income tax, FICA or FUTA.
2) The salary reduction limit is $2,700 per year

Question 58

What is the maximum tax-free reimbursement under a dependent care FSA?

Answer 58

$5,000/ year per employee, not per dependent

Question 59

Who can you claim eligible expenses for under a Dependent Care FSA?

Answer 59

1) Children under age 13; or

2) Anyone claimed as a dependent and with a mental or physical disability incapable of caring for themselves.

Question 60

List the fringe benefits that are tax-free

Answer 60

Employer paid health insurance premiums
Employer paid group life insurance premiums up to $50k
Value of qualifying day care provided by employer
Company car
Vehicle and transit passes ($265/month)
Parking ($265/month)
Occasional overtime meal money, cab fare, etc.
Discounts on company products if not more than employer’s profit percentage
Discounts on services limited to 20% of selling price

Question 61

What fringe benefits are taxable

Answer 61

1) Health insurance premiums paid for self-employed, partners and more than 2% owners of S corps (then deductible above the line).
2) Premiums paid on a group life policy in excess of $50k if nondiscriminatory.