Insurance Flashcards
What is adverse selection?
Underwriter attempts to manage adverse selection and weed out or manage those that need assistance.
What is insurance?
Used as a protection against financial loss.
Used only to protect against pure risks
Involves the transfer of loss and the sharing of loss with others
Is land cost included in the severity of loss?
No. Land and cost of building is $1,000,000 but $250k to build. max insurable risk is $250k
What are the causes of insured losses?
Perils
Hazards
If an underwriter was charged with managing profit, what would be his best tool?
Managing adverse selection. Going back and looking and folks usage of credit and risk factor.
Distinguish peril and hazard.
Peril is the cause
Hazard is the condition the creates or increases the likelihood of a loss occurring, then there is the Moral, Morale and Physical
What is an insurable risk?
CHAD - not catastrophic (to insurer), Homogeneous exposure units, Accidental, and measurable and Determinable.
What are the elements of a contract for insurance purposes?
A legal contract requires COALL –> Competent Parties, Offer and Acceptance, Legal consideration, and Lawful purpose
What are the principles of Insurance Contracts?
Indemnity
Subrogation
An insured must have and emotional or financial hardship resulting from danger, loss, or destruction.
What is difference between void and voidable?
Void: Lacked COALL
Voidable: allows one of the parties to cancel the contract
What are the three Principle of Utmost Good Faith?
Warranty
you don’t do something you agree to do
Representation
you say you don’t smoke, but you do
Concealment
silent to a fact material to the risk being insured
When must an insurable interest exist for a property insurance claim?
At the policy inception and time of loss
What distinguishes insurance contracts?
Adhesion
Aleatory
Unilateral
Conditional
What are the types of authority?
Express
The written agreement (the customer wouldn’t see this, the customer is about implied)
Implied
Everything looks like he has authority
Apparent
When the other thinks he has authority but there is no such authority
What are the important features of insurance contracts?
Conditions
Declarations
Exclusions
Riders and Endorsements
What is Actual Cash Value?
Replacement value minus deprecation.
Don’t forget about the deductible when questions ask about how much cash is given.
What are examples of perils that reduce the ability to earn?
Dying too soon
Living too long
Disability
What is the NAIC and do they have any regulatory power?
Provides a watch list of insurance companies based upon financial ratio analysis which measure the financial health of an insurance company.
States regulate insurance.
What are the six steps to risk management?
DIEDIE
Determine the objectives
Identify the risks
Evaluate the identified risks as to probability of occurrence and potential loss
Determine alternatives for managing risks
Implement the program
Evaluate, monitor and review
When does an insurable interest exist for a life insurance claim?
At the policy inception only.
What is the promise being made in the insurance contract?
That the insurer will pay the claim.
What is the coinsurance formula?
[insurance/ (percentreplacement)]damage
How might severity of loss be described?
The potential size or amount of loss.
What are some reasons for Life Insurance?
Income replacement
Income for readjustment period after the death of a loved one
Financial support for children or dependent parents
To fund education after the death of a loved one
Paying off debts
Income for surviving spouse
What is term life insurance?
Provides the highest benefit, with the lowest premiums and is simply a pure death benefit policy.
What are some types of term life insurance?
Annual Renewable Term
Level Term
Decreasing Term
What are some types of whole life insurance?
Ordinary Life
Limited Pay Life
Variable Life
CAWL
When might whole life insurance be more appropriate?
Anyone with lifetime or permanent needs
Estate Planning purposes to provide liquidity
Insured has a need for investment like performance
What are the five dividend options as they relate to dividends within a whole life policy? May also see the word “participating” - this only means gets dividends.
CRAP-O - Cash option, reduce premiums, Accumulate at Interest, Paid up additions, and Term (one year)
What are the settlement options for life insurance?
Lump Sum Payment
Interest Only
Annuity Fixed Life Income Fixed Period Life income with period curtain Joint and last survivor income
What are some life insurance nonforfeiture options?
Cash Surrender Value
Accumulated Cash Value less surrender charges
Reduced Paid up Insurance
Receives cash value with smaller face amount
Extended Term Insurance
Get insurance that is paid up for a term
What is Universal Life Insurance?
Insured can adjust premiums, face value and cash value
Insured does not direct the investment portion
Cash value can be used to actually pay the policy premiums
Universal A - Death Benefit increases after cash value hits a certain amount
Universal B - Death Benefit increases along with cash value
Variable - with investment options
Should a client who is risk adverse explore “variable” options with their life insurance?
Unlikely. Must match the clients’ risk tolerance with products suggested. This may mean that some options are eliminated.
What are the types of annuities?
Immediate - purchased with one lump sum
Deferred Annuity
Flexible Premium Deferred Annuity (FPDA)
Single Premium Deferred Annuity (SPDA)
Fixed
Variable
Equity Indexed Annuity
Should an annuity be considered as part of an inheritance?
No. This leaves nothing to an heir.
What is the difference between traditional life insurance and an MEC?
Traditional pays premiums back first
MEC pays earnings back first
What is the difference between traditional life insurance and an MEC with respect to loans?
Traditional from premiums first (nontaxable)
MEC from earning first (taxable)
What are the tax considerations for transferring a policy for value?
Tax free return of capital
Ordinary Income on Cash Surrender Value
Capital gains on remainder
Who can deduct premium payments on a group life insurance policy?
The employer
How would one impute the income on the excess group life insurance policy?
Benefit (Salary x multiple elected)
Less $50,000
Benefit - $50,000 = death benefit
Death Benefit / $1,000 * Sec 72 rate * 12 = annual imputed income
How are installments from an annuity taxed?
Total Payments received = Monthly * 12 * Life Expectancy
Basis - how much paid for policy
Exclusion Ratio = Basis / Total Payments
ER * Payment = Excluded Amount
Taxable Amount = Payment - Excluded Amount
What are some of the ADLs (Activities of Daily Living) that are considered when thinking about whether a person is chronically ill?
Cannot do at least two of the following for 90 days:
Eating Toileting Transferring Bathing Dressing Continence
Who is someone who is terminally ill?
Less than 24 months left to live.
If a terminally ill person sells a life insurance policy, who is taxed?
The purchaser to the extent the face value exceeds the purchase price.
If terminally or chronically ill, insured is not taxed on sale.
How are annuities taxed?
Earnings first, then return of capital.
When thinking of exchanging FROM Annuity TO Life insurance, what are the tax consequences?
Exchanging from an annuity to a life insurance policy is a taxable exchange.
What is one difference between life insurance and an annuity once basis has been returned?
The same exclusion continues for life insurance whereas for annuities, once all basis has been used, 100% taxable.
How do we determine how much out of pocket is paid upon a medical claim?
insured pays deductible
Insured pays co insurance amount up to stop limit
Insurer pays the rest
What is the difference between stop loss and max out of pocket?
We must include deductible for max out of pocket whereas the stop loss is measured on what is left after the deductible.
What is the amount and age for the catch up provisions for HSA purposes?
55 years old and $1,000
What are the periods of eligibility for purposes of COBRA?
18 months for normal term
36 months for divorce and death, Medicare eligibility, loss of dependency
29 months if meet social security definition of disabled
How is the period of Medicaid coverage determined?
Assets + 60 month lookback = Total/(cost of care)
What are the taxation of disability payments?
If paid with after tax, then nondeductible but not included in income
If employer pays, then the employer deducts and the receipt is income to recipient
If employee pays with pre-tax dollars, then taxable when received
What can be a disability?
Any Occupation
Cheapest
Modified Any Occupation
Own Occupation
More expensive, better for specific high paying job
Split Definition
What is a residual benefit?
Makes up the difference between wages before disability and wages after disability.
What are the differences between Broad Coverage and Open Perils Coverage?
Basic and broad policies are named perils.
Losses resulting from perils not specifically named are not covered.
An open peril policy covers all perils except those specifically excluded.
What are endorsements?
Some perils can be added to standard homeowner policies.
What is the formula for determining how much the insurance company will pay?
Amount of insurance carried/coninsurance amount x amount of loss
What is Coverage A?
Dwelling
What is Coverage B?
Other Structures
Are other structures that are used in a business covered under a homeowners’ policy?
No. Those would require a different policy.
What is Coverage C?
Personal Property
What is the difference between replacement cost coverage and actual cash value coverage?
Actual Cash Value: Takes depreciation into account against current replacement cost
Replacement Cost: Does not take depreciation into account (can get the current value)
What is Coverage D?
Loss of Use
What is Coverage E?
Personal Liability
What is Coverage F?
Medical Payments to Others
What are the HO Forms that are considered?
HO-2: Broad perils Basis
HO-3: Open Perils and All Risks, personal property is broad
HO-4: Renters
HO-5: HO-3, except personal property is open, not broad
HO-6: Condos
HO-8: Modified Coverage
What are the parts of Automobile Insurance?
Part A: Liability
Part B: Medical Payments
Part C: Uninsured motorist
Part D: Coverage for damage to insured car
Part E: Duties after an accident
Part F: General Provisions
What are the types of legal liability a person is exposed to?
Torts
Intentional Interference
Strict and absolute liability
Negligence
Breach of Contract
Criminal Offenses
What is a PLUP?
A PLUP provides an additional layer of protection after the underlying liability limits on a homeowner or auto policy have been exhausted.
What are some insurance considerations for business owners?
CPP (Commercial Package Policy)
CLUP (Commercial Limited Umbrella Policy)
Malpractice
E & O
Why would terminate damage not be included in an insurance policy?
It happens slowly and over time as a result of negligence.
What is included in Section I of a Home Owner Policy?
Coverages A - D
Which section (I or II) of a HO Policy has identical coverage for all forms of home owner insurance?
Section II (Personal Liability and Medical Payments to Others)
How many days after purchasing a new car must a person inform the insurance company?
30 days.
How are Split Limits read?
Bodily Injury/Per Occurrence for Bodily Injury/Property
How would you describe a policy that is written 100/300/50?
100,000 for bodily injury
300,000 max per occurrence
50,000 property damage
Do homeowner policies cover pets?
No
What is included in comprehensive coverage?
Under Part D, For Damage to the Insured’s Car
Fire Theft Vandalism Weather Related Running into animals Riots Falling Objects
What is the difference between collision coverage and comprehensive coverage
Collision - you hit something
Comprehensive - anything but a collision
What percentage might a retiree’s benefits increase each year if delay benefit?
8%
What are the parts of social security?
Part A - Hospital
Part B - Doctors
Except: Dental care, cosmetic, hearing aids, eye exams
Part C - Vision, Dental and Hearing
Part D - Prescription Drugs
What is a Medicare Supplement?
Is designed to offset costs associated with Medicare deductibles and coinsurance.
What is the formula for determining the reduction of benefits?
Years early * 12 * 5/9% (up to 3 years)
If more than three years, after year 3, it is 5/12%
What is the minimum age to be in order to automatically qualify for Medicare?
If collecting social security at age 65, then automatically enrolled in Medicare.
What is the early retirement age minimum?
62
When can benefits be paid to the dependent parents of a deceased insured?
At age 62
