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Danko + MJG > Insurance > Flashcards

Insurance Flashcards

1
Q

What is 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 Peril?

A

The cause of a loss, the event 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

What are the Elements of Insurance?

A
  • Large number of homogeneous exposure units
  • Loss must be definite and measurable
  • Must be fortuitous or accidental
  • Must not be catastrophic (for the insurance company)
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5
Q

What are the Methods to Avoid/Reduce Loss?

A

Mnemonic: DATRR

  • Diversification: Duplication of assets or activities at different locations
  • Avoidance: Do not drive, Do not purchase a home but rent
  • Transference: INSURANCE
  • Retention: Voluntary - Recognizes that the risks exist and assume losses (deductible, coinsurance)
  • Reduction: Sprinkler system, safety programs
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6
Q

What is Insurable 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

What are the Parts of the Insurance Contract?

(DDICE)

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.
  • DICE
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8
Q

What are Negligences?

A
  • Attractive Nuisances: Swimming pool, vacant lot
  • Negligence per se: Violation of a statute
  • Strict Liability
  • Product Liability
  • Absolute Liability: Workers Comp
  • Vicarious Liability: Respondeat superior (principal’s liability for their agents).
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9
Q

What are 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

What are two methods of Calculating Life Insurance needs?

A
  • Capital Utilization Approach: Uses annuitization to provide needed income but leaves no money at the end of the planned period.
  • Capital Needs Approach: 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

What are the most comprehensive Insurance Rating Service/Category services?

A
  • A.M. Best: A++ to F
  • Standard & Poor: AAA to CCC
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12
Q

What are Sections of a Homeowner’s Policy and

what do they cover?

A

Section I (Coverage: A B C D)

  • 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 (Coverage: E F)
  • E - Liaiblity
  • F - Medical Payments
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13
Q

What property is excluded under Personal Property Coverage?

A
  • Animals, Birds, or Fish
  • Motorized Land Vehicles and Aircraft
  • Property of roomers, boarders or other tenants
  • 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

What are the Basic Form Perils Covered?

(WHARVVES/FLT)

A

The policy lists perils covered:

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

Study Hint: Remember: WHARVVES/FLT

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15
Q

What are the Broad Form Perils Covered?

A
  • Rupture of a System
  • Artificially Generated Electricity
  • Falling Objects
  • Freezing of Plumbing

Study Hint: Remember Basic plus RAFF

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16
Q

Homeowner’s Policy Exclusions include:

A
  • Earthquake
  • Flood
  • Neglect
  • Intentional Loss
  • Ordinance/Law
  • Power Failure
  • War
  • Nuclear Hazard

Note: Sinkhole is a covered peril for the exam

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17
Q

What is the formula for Replacement Cost Coverage?

A
  • Replacement Cost x Coinsurance Percentage = Insurance Required
  • Insurance Carried ÷ Insurance Required x Loss - Deductible = Amount Paid by Insurance
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18
Q

What are the requirements for a vehicle to be eligible for:

  • Insurance Services Office (ISO)
  • Personal Auto Policy (PAP)
A
  • Be owned by an individual or by a husband and wife living in the same household
  • Be private passenger auto
  • Not be used as public or livery conveyance
  • Not be rented to others
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19
Q

What are the Parts of an Auto Insurance Policy?

What do they cover?

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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20
Q

What is classified as a “Covered Auto” under an

Auto Insurance policy?

A
  • Any vehicle shown on the declarations 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 declarations page
  • Any auto or trailer you do not own while used as a temporary substitute for any vehicle decribed herein which is out of normal use because of a breakdown, repair, servicing, loss or destruction
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21
Q

Who are the 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 persons while an occupant of the insured’s auto (passengers)
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22
Q

What is Uninsured Motorist Coverage (UM)?

A

This agreement promises 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

Note: UM is liability protection, NOT medical payments

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23
Q

What are the perils covered under the “Other Than Collision” Provision of an Auto Policy?

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
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24
Q

What are the benefits of an 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!
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25
Q

What are the two types Professional Liaiblity Insurance and who/what does it cover?

A
  • Malpractice - Bodily Injury (doctors, dentists)
  • Errors and Omissions (E&O) - Monetary damages (financial advisors, lawyers, accountants, insurance agents)
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26
Q

What does Worker’s Compensation cover?

A
  • Unlimited Medical Expenses
  • Diasbility Income (TAX FREE)
  • Death Benefits
  • Rehabilitation (Medical and Vocational)
  • Absolute Liability
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27
Q

Medicare does NOT cover…

A
  • Routine foot care, glasses, hearing aids, and dental
  • Emergency Care outside the US (some exceptions for Canada, Mexico and Caribbean)
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28
Q

Explain the limitations of Medicare’s Long Term Care coverage.

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 day 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
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29
Q

Compare 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%
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30
Q

What are the COBRA coverage requirements and

Qualifying Events?

A
  • Must have 20 Full/Part-Time Employees.
  • The option to buy Continuation.

Coverage must be offered to: (Qualifying Event?)

  • Terminated employees/dependents up to 18 mo.
  • Voluntary or involuntary termination, change from FT to PT
  • Spouses and other dependents up to 36 mo.
  • Employee’s death, divorce, legal separation, or eligibility for Medicare Children of Employees up to 36 mo.
  • Loss of dependent status (marriage)
  • Reaching dependency age limit specified by plan

Termination of employment for gross misconduct is not a qualifying event for purposes of COBRA

31
Q

What is a Health Savings Account (HSA) and

what are its benefits?

A
  • Used in conjunction with High Deductible Health Plan (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 20% penalty if under 65
32
Q

What are the Definitions of Disability?

A

Own Occupation - Best definition for the insured

  • Modified any occupation

Split Definition - Own then modified

Any Occupation (Social Security definition)

  • Loss of Income
33
Q

What are the Policy Continuation Provisions for Disability Income?

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
34
Q

Taxation of Premiums and Benefits for 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 employee

The employee owns the contract and the employer pays the entire premium under a bonus arrangement like section 162 disability insurance:

  • Premiums are deductible by the employer as a bonus
  • Benefits are tax free to the employee.

The employee owns the contract and the employer pays the entire premium under a salary continuation plan (group plan).

  • Premiums are deductible by the employer
  • Benefits are taxable to the employee
35
Q

Permanent Life Insurance (Low Risk Tolerance)

A
  • Insurance company controls the investment return
  • Assets part of the general account
  • Whole Life
  • Universal Life
36
Q

Permanent Life Insurance (High Risk Tolerance)

A
  • Client controls the investment return
  • Assets part of a separate account
  • Variable Life
  • Variable Universal Life
37
Q

What are the Dividend Options on Life Insurance?

A
  • Cash
  • Reduce Premium
  • Accumulate with Interest
  • Paid up Additions
  • One-year Term/5th Dividend

Remember: CRAPO

38
Q

What are the Nonforfeiture Options of Life Insurance?

A
  • Cash
  • Extended Term
  • Paid Up Reduced Amount
39
Q

What are the Life Insurance Settlement Options?

A
  • Cash
  • Pure Life/Single Life
  • Refund
  • Period Certain
  • Specified Income/Period
  • Interest Only
  • Joint and Survivor
40
Q

What is a 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 59½ are also subject to 10% federal penalty tax (if not disabled)
  • Death Benefit is still tax-free
41
Q

What are the MEC Grandfather Life Insurance rules?

A
  • If death benefit increases by $150k or less and the insured has guaranteed insurability (no proof of insurability), the policy will NOT lose its grandfathered (non-MEC) status.
  • If the policy increases by ANY amount and the insured must prove insurability, the policy MAY lose its grandfathered (non MEC) status.
42
Q

When are the proceeds in a Life Insurance policy 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 main exceptions to this rule are:

  • A sale or transfer to the insured (most common)
  • 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
43
Q

What are the 1035 Tax Free Exchange Rules?

A
  • Life → Life (OK)
  • Life → Annuity (OK)
  • Annuity → Annuity (OK)
  • Annuity → Life (NO WAY!)
44
Q

Buy Sell Stock Redemption

vs

Cross Purchase

A

Stock Redemption:

  • No Step up in Basis

Cross-Purchase:

  • Step up in Basis
45
Q

Explain Annuity Taxation

A

Periodic Payouts:

  • Basis / Payout = Tax-free

Lump Sum Payouts:

  • LIFO (Interest First Rule)
  • Ordinary income plus 10% penalty if under 59½
46
Q

What are the characteristics of a

Flexible Spending Account (FSA)?

A
  • Must be used by March 15th or forfeited to the company (use it or LOSE it - Medical Only)
  • Dependent Care must be used by 12/31
  • Not subject to income tax, FICA or FUTA
  • Health FSA may not be used to reimburse employee premiums paid 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.
47
Q

What are the major Tax Free Fringe Benefits?

A
  • Health Care Premiums
  • Insurance Premiums on non-discriminatory group life policy up to $50k
  • Company car for working conditions only
  • Employer-provided transit passes ($270/mo. cap) or parking ($270/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
48
Q

When are Fringe Benefits taxable?

A
  • Health Insurance Premiums paid for self-employed, partners, and more than 2% owners of an S-Corp are 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.
49
Q

Which HO forms are for what?

A

Residential (increasing levels of coverage):

  • HO 2 - broad form (18 perils covered)
  • HO 3 - open perils
  • HO 5 - open perils (w/increased contents coverage)

Specific types of dwellings:

  • HO 4 - renter
  • HO 6 - condo
  • HO 8 - historic homes
50
Q

Fixed Annuity Exclusion Ratio

A

fixed annuity exclusion ratio =
investment in the contract

expected return

EXAMPLE:

Jimmy has a basis of $400,000 in his nonqualified fixed annuity. His life expectancy at age 65 (when he will begin making distributions from the annuity) is 25 years, and his monthly payment is expected to be $2,000. Therefore, his expected return in the contract is $600,000 (25 × 12 × $2,000). Jimmy can exclude from income annually an amount of $16,000 [($400,000 ÷ $600,000, or 0.6667) × 12 × $2,000]. Conversely, Jimmy would need to include in income an amount of $8,000 annually as ordinary income.

51
Q

Variable Annuity Exclusion Amount

A

variable annuity exclusion amount =
investment in the contract

annuitant’s life

EXAMPLE

William purchased a variable annuity at age 63. The total cost of the contract was $150,000. The annuity starting date was January 1 of the year he purchased the annuity. His annuity will be paid in monthly payments starting July 1 of the year he purchased the annuity in variable installments for the rest of his life. Based on IRS Table V, William’s life expectancy is 21.6 years. The tax-free amount of each payment, until he has recovered the cost of his contact equals:
investment in the contract = number of expected payments* *multiple for age 63 per Table V
If William’s first payment equals $800, he will include $221.30 ($800 – $578.70) in his gross income.

For further clarification:

Step 1: Investment in the contract ÷ annuitant’s life

Step 2: Investment in the contract ÷ number of expected monthly payments or years William is expected to live based on IRS Tables
Step 3: $150,000 ÷ 21.6 = $6,944.44 (annual) ÷ 12 = $578.70 each month

52
Q

Cross-purchase vs. Entity Agreement

A
53
Q

When are disability insurance payments first made?

A
  • Paid in arrears
  • Paid 30 days after elimination period eds
54
Q

What life insurance best provides for:

  • Short-to intermediate-term need
  • largest death benefit for minimum initial premium
A

Term

  • DB = fixed, level
  • Premiums = Increasing/exponential after term
  • Cash = no
  • Advantages:
    • Low premium
  • Disadvantages:
    • Increasing premium after term
    • Most term insurance lapse
55
Q

What life insurance best provides for:

  • Lifetime coverage
  • Low risk tolerance
A

Whole Life

  • DB = fixed, level
  • Premiums = fixed, level (pay until age 100)
  • Cash = yes, based on guaranteed interest rate
  • Advantages:
    • Predictable
    • Forced savings
    • Conservative investment
  • Disadvantages:
    • High premiums
56
Q

What life insurance best provides for:

  • Investment performance
  • Higher risk tolerance
  • Client controls investments
A

Variable Life

  • DB:
    • Guaranteed minimum
    • Can increase with investments, but cannot go down
  • Premiums = fixed, level
  • Cash = yes, based on investment performance, not guaranteed
  • Advantages:
    • Combines life insurance investment
  • Disadvantages:
    • Investment risk on owner
57
Q

What life insurance best provides for:

  • Flexibility in premiums and benefits
  • Can be adjusted up or down
  • Assets part of insurance company’s general account
A

Universal Life A & B

  • DB:
    • A: traditional
    • B: includes a PLUS cash value
  • Premiums = flexible, thus not recommended for clients on a fixed income
  • Cash:
    • Yes
    • Varies depending on face amount and premium
    • Minimum guaranteed interest
    • Excess increases cash value
  • Advantages:
    • Flexible
  • Disadvantages:
    • Some investment risk to owner
58
Q

What life insurance best provides for:

  • Need for performance
  • Flexibility
  • Assets are part of a separate account
A

Variable UL

  • DB = level of protection can be adjusted up or down
  • Premiums = premiums can be adjusted up or down
  • Cash:
    • Yes
    • Varies depending on face amount, premium, and investment performance
    • Not guaranteed
  • Advantages:
    • Flexiblity
    • Investment options
  • Disadvantages:
    • Owner bears investment risk
59
Q

How are the following insurance payouts taxed:

  • Lump-sum
  • Interest
  • Installment
A
  • Lump-sum = no tax, unless transferred for value
  • Interest = ordinary income
  • Installment = Principal portion is received tax free; earnings accrued since insured’s death are taxable as ordinary income
60
Q

What is the interpolated terminal reserve?

A

Interpolated terminal reserve = FMV of gift life insurance policy

61
Q

How are non-person annuities taxed?

A

Earnings in annuities are taxed as ordinary income for NON-PERSON annuities

62
Q

What is the waiting period to start Social Security disability claims?

A

5 months

63
Q

After being on Social Security disability for 24 months, what do you become eligible for?

A

Medicare

64
Q

What are the employee eligability requirements for COBRA?

A
  • 20 or more employees
  • Full time employees = 1 employee,
  • Part time employees count as 1/2
65
Q

What are the time periods for COBRA coverage?

A
  • Employment = 18 months
  • Misc. life events = 36 months
  • SS definition of disability = 29 months
  • Must elect for coverage within 60 days of qualification for COBRA notification
66
Q

ISO Taxation cheat sheet

A

Note: both holding periods must be met or else the option will be taxed as W2 income

67
Q

Homeowners insurance coinsurance formula

A
68
Q

What does unfunded vs. funded refer to with qualified plans?

A
  • Unfunded = substantial risk of forfeitures
  • Funded = no substantial risk of forfeiture
69
Q

How does transferring for value affect taxation?

A
  • Gain at sale = sales price - basis
  • Capital gain = gain at sale - ordinary income component
  • Orindary income = cash surrender value - investment in the contract
  • Investment in the contract = premiums paid - dividends received - outstanding loans/withdrawals
70
Q

How do you calculate life insurance needs using the capital retention method?

A
  • Life insurance need / interest rate
  • Needs might be overestimated
  • Does not take inflation into account
71
Q

How do you calculate life insurance needs using the human value method?

A
  • According to the principle of human life value, the purpose of life insurance is to replace an individual’s economic value.
  • This method considers the income of the individual through the remaining work-life expectancy, including raises. Then, applying a discount rate to this total, the present value of the life is determined
72
Q

How do you calculate life insurance needs using the financial needs analysis method?

A
  • Examines all recurring expenses to dependent survivors and any unusual expenditures that may result from the death of the insured
  • The needs of a family may be classified as follows:
    • A fund for final expenses—includes last medical costs and funeral costs
    • A fund for readjustment—covers the period immediately following death and may include nonrecurring costs as the family adjusts to the death of a provider; typically two years
    • The dependency period income fund—usually the period of the highest needs because the children or dependents require income for current living and other routine costs to maintain a household
    • The mortgage payment fund
    • The education fund
    • Life income for the surviving spouse—the need for this arises if the spouse is either not employed and does not have the necessary skills to become employed or cannot produce sufficient income. Life insurance also creates income for the blackout period when Social Security benefits cease for the spouse because of the child’s age and the spouse has not reached age 60. This amount also includes any retirement income in excess of Social Security benefits.
73
Q

What is the death benefit for a life insurance policy in a qualified plan?

A

When a beneficiary receives the death benefit from a life insurance policy funded within a qualified plan, the taxable portion equals:

Cash surrender value - any costs included in the participant’s income during the participant’s life

Danko + MJG (7 decks)

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