Insurance Flashcards
collateral source rule
you can still sue for negligent party for damages even if insurance paid out
Parts of the insurance contract DDICE
Declaration page Definitions Insuring agreements Conditions- duties and rights of parties Exclusions
Homeowners Coverage and %
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
Does COBRA cover group dental and vision?
Group disability?
Yes, No
which insurance premiums are qualified medical expenses for HSA
COBRA, qualified LTC insurance
HRA (Health Reimbursement arrangement)
ONLY for C corps
- solely employer-funded
- reimburses medical expenses up to max amount per period
- no OTC drugs
Social Insurance Substitute (SIS) benefit- how does it work (disability insurance)
it’s a rider that pays you a certain amount that’s reduced by SS when it starts paying
taxation of disability for partnership/S corp owners
premiums paid for greater than 2% owner can be deducted by the partnership/s corp, and the owner gets tax free benefits
Non-tax qualified (NTQ)- LTC insurance
“medical necessity” trigger- doc certifies patient needs care, then policy pays
-premiums not deductible
Partnership Qualified LTC insurance policy (PQs)
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
1035 exchange
no annuity to life,
can’t be done if insured changes
“what type of life insurance should client get?”
endowment is WRONG answer!
consider risk tolerance
waiver of premium (UL/VUL policy)
“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)
Life settlement (not ill, over 65)
life insurance surrender
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
“carve-out” plan? (group life)
discriminatory plan, the $50,000 exemption not allowed
I-42 example****
$0.29 x 200 x 12= $696
VEBA (Voluntary Employees’ Beneficiary Associations)
funds benefits for members:
death, medical, child care, severance, edu, disability, legal, unemployment
life insurance- capital retention approach question
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)
when do you risk turning your policy into MEC?
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
FSA (Flexible Spending Account or Section 125)
LTC?
experience gain?
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
- No FICA/FUTA
- No LTC
- Not HSA
- 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
taxation of life insurance payout- single life pure annuity example
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 (
group life- how much income is charged for benefit? (using Table 1)
conversion?
$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!
Homeowners
Sections I and II
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
joint life annuity vs joint-and-survivor annuity
joint-life: payments case on death of first (no good use……)
qualified LTC policies characteristics
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)
Underwriting insurance (5 sources of info used)
- application for insurance
- info from agent or broker
- investigations
- info bureaus
- physical exam or inspections
to make law of large numbers work, homogeneity- reasonable equity between better and poorer
premiums paid for group term life deductible business expense?
always- it can even discriminate in favor of key employees
LTC- taxation of premiums and unreimbursed expenses
deductible as itemized medical expenses if qualified- but limitation by age
benefits are generally not taxable
residual disability definition
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.
Business Owner’s Policy (BOP)
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
Human life value method (life insurance)
based on income-earning ability- PV of income lost by dependents resulting from the death (doesn’t take into account other resources)
MEC
- 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
comprehensive major medical coverage calc
$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)
HIPAA
- designed to reduce “job lock”
- can move from old plan to new employer’s plan without meeting pre-exiting req
professional liability covered by?
ONLY by Errors and Omissions
personal umbrella, commercial umbrella, BOP all have exclusions for pro liability
Business Overhead Expense (BOE) covers, exclusion, benefits
BOE can pay for pro liability policy premium (normal business expense)
salary excluded
premiums are not deductible but benefits are tax free
participating policies
they don’t ALWAYS have to pay dividends
larger premiums charged, but if not needed, returned as dividend (generally TF)
life insurance conversion- what’s allowed?
you can only exchange term for permanent!
mortality table?
Extended term option (nonforfeiture) puts the company at more risk, so they’re permitted to use higher mortality tables (adverse risk)
annuity held by non-natural person (like corporation or certain trust)- taxation
income must be treated as ordinary income (to the corporation holding it)
(also, if income is ordinary income, loss is also ordinary loss)
HSA (health savings account)- qualified expenses (distributions not taxed)
think “medical IRA”- it’s a savings account
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)
when calculating medical insurance payout-
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
annuity that always produces highest payout
life annuity (aka pure life annuity, straight life annuity)
COBRA (in case of divorce)
wife covered 36 mon, child isn’t limited to 36! still covered normally as his daughter
Medicare coverage parts A and B
Medicare Part B premium deduction
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
Homeowners Coverage C: personal property
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
worker’s compensation insurance- what’s covered and not
sick-leave not covered!
disability, rehab, survivor’s death benefit, medical expense (unlimited) covered
insurance pays greater of ACV or replacement cost
see live review I-11 to 12
ACV:
$36,000 (loss (damage) on roof) x 50% (depreciation-given) less deductible
replacement cost- you know it
watch out for FLOOD (not covered)
Medicare coverage calculation example
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
viatical settlement (terminal illness)
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
subrogation
ex: insurance pays insured for loss, but makes a claim against the person who caused the loss
aleatory contract
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)
“attempt to cope with inflation” or “keep up with market conditions” for suitability question for annuity or life insurance–>
variable product (annuity or life) is usually correct choice for exam
fringe benefits (tax free)
taxable
- 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)
transfer for value (life insurance death benefit taxation)
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
fringe benefits (tax free)
- 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 employer provided plans
- prepaid legal plan paid for by ER
- individual disability plan paid for by ER
- group disability paid for by ER
LTC premium deduction by age (W2 AND SE)
Age 51-60 $1580/
Age 610-70 $4220/yr
insurance premiums made up of?
premium made up of: 1. pure insurance cost (cost for insurance co), 2. cash value (permanent)
Respondeat superior
Vicarious liability
Corporate paid insurance premiums- deductible and not deductible
Deductible- Business owners Workers compensation Futa D&O
Not deductible- key man life insurance
Surrender of life policy (w loans and dividends reducing premiums)
$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
Discriminatory group term life insurance- first $50k excludable?
Key employee can’t deduct but non-key employees can
What benefits can be offered under the cafeteria plan?
Cash benefits
Group term life
Nonqualified deferred comp
Accident and health benefits
Nonqualified deferred compensation cannot
selling life insurance-
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
group policy conversion
group health-> individual (not good and expensive, better than nothing)
group life-> into permanent, not term
group disability-> not convertible
life insurance death benefit amount
don’t forget paid-up additions…
can a company borrow from the cash value of life policies on key employees and deduct the interest?
yes, but limited to $50,000 loan on each policy
compensatory structured settlement
does NOT cease at death. PV of unsatisfied payments included in gross estate
