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CFP EXAM FLASHCARDS > Insurance > Flashcards

Insurance Flashcards

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

Hint: RTARD

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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?

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): Romaine lettuce with e. coli
  • 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 (abode) - Dwelling and Attached Structures
  • B (building) - Other structures, separate from dwelling (detached garage, fences, sheds)
  • C (contents) - Contents and Personal Property
  • D (‘dditions) - Loss of Use Section II (Coverage: E F)
  • E (enemy) - Liaiblity
  • F (First Aid) - 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?

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

Hint: think “God” - Earth, Water, War, “Power”, & Law

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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

Hint: ReCo LoCo

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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
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!
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)
26
Q

What does Worker’s Compensation cover?

A
  • Unlimited Medical Expenses
  • Diasbility Income (TAX FREE)
  • Death Benefits
  • Rehabilitation (Medical and Vocational)
  • Absolute Liability
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)
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
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%
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
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: Lifetime payments, payments for specific number of years
  • Universal Life (flexible): Premiums and level of protection can be adjusted up or down
36
Q

Permanent Life Insurance (High Risk Tolerance)

A
  • Client controls the investment return
  • Assets part of a separate account
  • Variable Life: Fixed Premium
  • Variable Universal Life: Premiums and level of protection can be adjusted up or down
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)
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!)

Hint: Lindsay Lohan went to

Las Angeles for

AA

44
Q

Buy Sell Stock Redemption

vs

Cross Purchase

A

Stock Redemption (Entity Purchase):

  • Corporation purchases stockholder’s interest upon death
  • Corporation is owner/beneficiary of Life Insurance policy
  • No Step up in Basis at the death of stockholder

Cross-Purchase (Stockholder Purchase):

  • Surviving stockholder agrees to purchase decedents share
  • Step up in Basis at the death of stockholder
  • # of Life Insurance policies = # of owners x (#-1)
45
Q

Split Dollar Insurance:

Endorsement Method vs

Collateral Assignment Method

A

Split Dollar shares cost and benefits between Key EEs and entity

Any payment made by ER to split dollar plan is either:

  • Collateral assignment method: a loan*
  • Endorsement method: taxable compensation

*If loan interest is zero (or below market) difference between market rate and FMV is treated as taxable compensation to EE.

46
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
47
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.
48
Q

Health Reimbursement Arrangement

(HRA)

A
  • Only available for C Corporations
  • Soleley employer-funded
  • Reimburses employee medical expenses up to maximum amount per coverage period
49
Q

Medicare Part A ELIGIBILITY

(hint: hospital insurance)

A

All persons 65+ eligible for SS benefits or railroad retirement program

  1. Any disabled person who has received SS disability benefits for 2+ years
50
Q

Medicare Part A BENEFITS

A
  1. Hispital care
  2. Care in a nursing home/SKILLED care (100 day max)
    1. ALL of first 20 days
    2. everything OVER $170.50/day for next 80 days
    3. patient must be EXPECTED TO IMPROVE
  3. Home Health Services
  4. Care in a hopsice
51
Q

Meicare Part B BENEFITS

(hint: Docs & Tests)

A
  1. Physicians’ services (usually 80% after deductible; NO STOP-LOSS)
  2. home health services (also in Part A)
  3. diagnostic tests
  4. all outpatient services (participanting hospitals ONLY)
52
Q

Taxation on an annuity held by a non-natural person

(corporation)

A

The income on the contract must be treated as ordinary income received or accrued by the holder during that year.

53
Q

Transfer for Value

(Life insurance)

A

If an interest in a life insurance ploicy is transferred to valuable consideration (not a gift) the proceeds in excess of the consideration paid for the policy, combined with any premiums paid by the owner, are taxable as ordinary income.

Exception:

  • Sale of transfer to the insured
  • sale or transfer to a partner or partnership in which the insured is a partner
  • sale or transfer to a corporation in which the insured is a shareholder
  • transfer of proerty incident to a divorce
54
Q

MEC Distribution Rules

A
  • Taxation of distributions (withdrawals or loans) is similar to taxaxtion of deferred annuities
  • Distributions are taxed LIFO
  • taxable distributions before age 59½ receive 10% penalty tax
  • Dividends paid by mutual LI companies under MEC are taxable as income if they are:
    • received in cash or to reduce premiums due
    • retained by the insurer in repayment of a policy loan
55
Q

HRA/HSA/FSA

(definition)

A
  • HRA: an ER‐funded plan that makes available to employees a fixed pool of money to reimburse for qualified medical expenses (not taxable to employees).
  • HSA: It is a trust created exclusively for the purpose of paying for the qualified medical expenses of the account holder. The account holder may be any individual covered by a qualifying high deductible.
  • FSA: It is an option under a cafeteria plan through which EEs may defer salary on a pretax basis into an account created exclusively for reimbursing or paying the qualified medical expenses of the employee.

CFP EXAM FLASHCARDS (7 decks)

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