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CFP > Insurance Concepts > Flashcards

Insurance Concepts Flashcards

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1
Q

Advocis coverage

A

1m or 90% death benefit
5k or 90% income (disability)
250k health (critical illness)
100k guaranteed value of seg fund, accumulating fund, cash account.

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2
Q

Regulation

A

regulated and legislated at provincial level

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3
Q

Mutual companies

A

owned by policy holders

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4
Q

Offer, acceptance, consideration

A

offer = application
acceptance = policy document and receipt
consideration = represented by initial premium

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5
Q

parties to contract

A

insurer
insured - can insure key employee. can insure equipment but must transfer policy to corp if asset is transferred to corp
life insured - annuitant

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6
Q

false representation types

A

mistake - (clerical or simple error) insurance company will work to resolve, adjust premiums and wont typically deny a claim
misrepresentation - (incorrect response or failed to disclose relevant info) can deny claim within 2 years of policy issuance, may be a mistake or deliberate omission. ought to have had the right insurance
fraud - deliberately withheld information to gain advantage. contract is voidable (can’t void later if originally ignored). premiums can be kept by the insurer

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7
Q

Policy lapse timeframe

A

60 days without premium payment (2 payments). can be reinstated within 2 years (pay missed premiums and update underwriting evidence)

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8
Q

CSV

A

usually doesn’t build until 8-10 years due to costs of placing a policy. can borrow against csv or withdraw if extra deposits made in the past. interest is charged on policy loan but can be capitalized (deducted from death benefit if insured dies during loan period)

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9
Q

Non forfeiture ( 3 optinons)

A

insurer will use csv to pay policy premiums
1)automatic premium loan - step one. create a policy loan and use it to pay premium
2)reduced paid up insurance - reduce the face amount and use csv earnings to fund policy
extended term insurance - switch policy to term, maintaining original face value

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10
Q

non cancellable, guaranteed renewable (most common life insurance)

A

premiums and coverage not subject to any potential changes. can raise premiums for a group but not and individual.

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11
Q

guaranteed renewable

A

can renew as long as certain changes aren’t made (such as significant insurability changes or career change for disability contract) may increase premiums or reduce coverage. typically less costly than non cancellable.

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12
Q

Optionally renewable

A

similar to guaranteed renewable. slightly more restrictive and less costly

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13
Q

commercial or cancellable

A

least expensive and most restrictive. sets a number of conditions under which they won’t renew (property insurance, casualty, and group insurance contracts or normally this way)

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14
Q

Auto insurance

A

liability - 3rd party protection to whom suffers loss due to other driver
collision risk - smaller than liability, can cover fires, broad set of losses or be comprehensive
personal injury risk - hospitalization benefits, income replacement, lump sums

endorsements - extend coverage to things the normal contract wouldnt

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15
Q

Home insurance

A

detached structures covered for 10% of dwelling building portion. personal property covered for 60% of dwelling amount. living expenses = 20% of dwelling amount. personal legal liability of up to a million around the world.
voluntary medical payments of 5k and 500 for damage to another person’s property. (without creating legal liability)

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16
Q

optional additions (endorsement)

A

specific contents, sewer backup, flood, wind damage, earthquake.

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17
Q

Liability insurance

A

important for business owners (errors and omissions, medical malpractice). need to determine and amount and the activities covered

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18
Q

Lapse benefit to insurer

A

reduce reserves but keep some or all of premiums paid

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19
Q

Mortality table and policy term

A

10 year contract will use average mortality cost based on next 10 years of insureds life

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20
Q

Death benefit vs face value

A

lower if outstanding policy loan. higher as with many caash value insurance policies. premiums start low but costs can even out over time or become cheaper if you live long enough (permanent insurance)

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21
Q

term insurance

A

mostly 10 or 20 year renewable. convertible insurance can be switched to permanent (no underwriting but higher premiums before and after conversion)

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22
Q

Whole life 3 components

A

insurers expenses
investment - used to generate policy reserve to fund death benefit (based on guaranteed set of investments. wil grow over time and reduce need for protection components (when policy reserve is low early on, protection component is quite large. policy will eventually be paid up (when policy reserve can fund the death benefit) policy growth is guaranteed and non taxable. death benefit doesnt increase regardless of csv, unless additional contributions are made (investment component creates additional costs. protection component is net amount at risk. this amount decreases as policy reserve grows)

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23
Q

Policy dividends

A

1)take cash, leave on deposit with insurer or invest in seg fund
2)reduce premiums
3)buy more insurance (term additions (1 year non renewable), special term additions (cash and 1 year term policy), paid up additions (more perm insurance)

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24
Q

Universal Life Death Benefit Options

A

-Level plus acct value (most expensive) (death benefit fluctuates. (face value plus investment account balance)
-level plus cumulative gross premiums. face value plus sum of al premiums paid (second highest coi). not all offer this option.
-indexed. based on inflation

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25
Q

Term to 100

A

pay average amount between now and age 100 (paid up). no non forfeiture clauses. only insurance. no policy loans, no csv. usually used when late estate plan is required. term life can be switched to permanent policy.

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26
Q

life insurance Riders

A

GIB (purchased for kids sometimes. will allow them to purchase larger insurance in future without underwriting, but higher premiums).
ADAD - loss within 365 of accident
Advance of death benefit - in case of critical illness
premium coverage in case of disability.
Common exclusions - impaired driving, acts of ware, suicide, self inflicted injuries, poisonous gas, under influence of drugs, flying on private aircraft, loss for medical treatment, poisonous substance ingestion, illegal activities,

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27
Q

EFA amounts

A

15k for funeral, 20k for cementery services.

12k saved for funeral and 19k for cementery = 31k total. funeral expenses of 25k =
38k total savings - 19k -12k = 7k taxable.

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28
Q

EI/CPP/ Workers Comp

A

EI can be paid up to 26 weeks (55% of benefits up to limit) taxable (2 week waiting period)
CPP-long term disabilities, taxable.
Workers comp. - tax free replacement of 85-90% of after tax income, up to about 6k per month, short waiting period. issues arise when income is over 80k -90k or so.

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29
Q

Weekly indemnity/LTD

A

WI 1-15 day waiting period - benefit paid for 15-104 weeks. tax free, pay usually about 66.7% of salary) after tax income. as high as about 4k per week. can be taxable if employer pays for it, then covers 75% of salary.
LTD - replace 67-75% in most cases. may ask for 60% on the test. non evidence maximums are lower than regular benefits. NEMs refer to the maximum amount paid for someone who hasnt undergone medical underwriting. Usually paid under own occupation for 2 years, then switches to any occupation.

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30
Q

Pre-existing conditions

A

usually not covered under group contract for 1-2 years (in the beginning)

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31
Q

Group coverage

A

50% for very high earners, 60% for 60k-120k, 70% earning 40k-60k.

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32
Q

OWN/ANY/REGULAR

A

Own - covered if you can;t work your job. usually turns to regular/any occupation after 2 years.
any - covered if you can’t work any job
regular - covered if you can’t work in job that fits within skills, education, experience. will receive top up if it pays less than previous job, up to the face amount of contract.

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33
Q

Residual benefits/partial benefits/presumptive

A

residual - self employed earning between 20-80% of pre-disability income
partial - wage earner earning between 20-80% of income
these are optional definitions of disability and not all contracts include them.
Disability benefits paid 30 days in arrears
presumptive benefits - you return to work despite loss of sight, limbs, hearing, speech ,etc. will still pay full benefit

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34
Q

Living benefits insurance rider

A

waiver of premium (common), return of premium (between 50-100%), COLA, coverage enhancements (no medical underwriting, may be financial underwriting), medical consults

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35
Q

Group insurance and coversion

A

no underwriting usually, unless they originally decline membership, add optional coverage or go above non evidence maximums. exclusions or limitations for ltd benefits. many have conversion privilege, can take coverage after leaving without medical underwriting. That being said, you’re lumped in with smokers or people with presumably poor health (since those are most likely to convert coverage)

36
Q

irrevocable beneficiary

A

beneficiary needs to sign to be taken off. means policy can’t be altered without beneficiary consent. for separations, let person receiving support own policy and

37
Q

When a spouse can me removed from life insurance. Would new dependents have claim if your estate received life insurance and ex was the beneficiary?

A

after separation or divorce (regardless of irrevocability). dependents could make claim.

38
Q

corp owned life insurance

A

it has to be the beneficiary

39
Q

benefit of estate as life insurance beneficiary

A

proceeds can be used to create a disability trust. if theres a successful challenge of the will, would precious estate assets need to be sold to create liquidity? If insurance is there, this is less of an issue.

40
Q

fraud, mis representation and mistakes.

A

insurance regulators/legislation has handling as described previously but no set way to handle mistakes. to be handled between insured and insurer (adjust coverage or change premiums)

41
Q

only standard exclusion in life insurance

A

suicide in first 2 years. may add an exclusion for a specific activity insurer doesnt like. if you dont lie at the time of underwriting, the policy should pay.

42
Q

broad set of disability exclusions

A

organ donation, service in army, self harm,

43
Q

normal waiting period for disability coverage

A

90-180 days

44
Q

default beneficiary designation

A

revocable, have to explicitly ask for irrevocable. which requires beneficiary to sign to change. irrevocable can’t change their rights to the death benefit amount. should have contingent beneficiary.

45
Q

Who can be a beneficiary?

A

anyone, corp, trust etc

46
Q

3rd party life insurance contract

A

owner is different from life insured

47
Q

which document overrrides

A

the most recent document wins. if the will overrides, it should make direct reference to the policy. pretty clear in insurance legislation

48
Q

disadvantages of estate as beneficiary

A

not confidential, probate is charged, open to creditors

49
Q

price of liability insurance on property insurance

A

inexpensive

50
Q

knowns of non partictpating whole life policy

A

premiums paid, csv (growth is certain, std dev is 0), death benefit, how long you’re paying premiums for

51
Q

3 things we pay premiums for

A

insurer’s expenses (marketing, underwriting, compliance, admin), mortality costs (a lot gets paid here in early years, net amount at risk), policy reserve (as this is built, lower commitment to mortality costs. in non par, this is insurers business).

52
Q

par whole life policy expenses (how long until there is csv)

A

absorb about 8-10 years of premiums due to surrender charges

53
Q

life pay policy, when premiums are finished

A

stop paying premiums when policy reserve is equal to death benefit (sometimes never)

54
Q

20 pay premium structure

A

blend the cost of insurance, investments will pay for insurance in later years as costs rise (stop paying premiums when pv of policy reserve is equal to death benefit)

55
Q

cost of insurance on whole life in early years

A

costs comparable to 1 year term life policy costs, not premiums)

56
Q

whole life par insurance stress test on policy investments

A

tested continually to ensure they can pay death benefits, there’s regulatory restrictions in place

57
Q

what do universal life premiums go towards. and when yrt makes sense

A

investments, cost of insurance, expenses. anything left over after other 2 is allocated to investments. yrt (premiums for insurance are cheaper in the beginning and increase over time) makes sense in limited situations where policy holder is willing to fund the investment portion aggressively. can work out better if you get solid returns and using policy primarily for investment character. (going to use leverage). need appropriate assumptions around investment returns. only if you’re maxed out in registered accounts. doc engineer, etc. has some non reg

58
Q

UL example

A

professional has 200k csv at retirement, uses csv as collateral loan, interest can be capitalized and is deducted from death benefit paid if still owed at death (insured retirement plan)

59
Q

ul premiums

A

more flexibility in premiums

60
Q

paid up additions

A

buy more perm insurance

61
Q

Dividend scale

A

may be framed as portion of total investment. not comparable directly to other investments because if you invest 1k in the policy, you don;t earn a 6% dividend on 1k. its on the amount after costs of insurance

62
Q

T100 feature and suitability

A

no csv, level death benefit, pay bare minimum cost of insurance, permanent insurance. paid up between 96 and 100. Works with couple in late 60s or 70s whove done an estate freeze and know exactly what it will cost to die. joint and last to die t100 will offer favourable pricing.

63
Q

questions for rider

A

what risk does it address, what does it cost, chances it gets used, does it increase chance they buy what they need.

64
Q

Common riders

A

guaranteed insurability benefit (no medical underwriting for more insurance), inflation protection,

65
Q

Needs analysis elements

A

how does cash flow change (increases to needs and reductions due to the other person being gone). pension contributions important to consider, childcare costs, transportation, meals, etc. payoff debt, take time off work?

66
Q

own occupation

A

usually covers for about 2 years then goes to any occupation.

67
Q

all sources max

A

85% of after tax income (punishment is worse if you’re in a higher tax bracket). ltd insurance reduced by other forms of disability income and regular income (with residual benefits). Use a benefit schedule to avoid paying premiums for benefits you can’t fully receive due to the max. ex. 66% up to 70k and 40% on income over that.

68
Q

how to get around first payor provisions, all source maximum, second sources of income

A

retirement savings rider, creditor disability insurance.

69
Q

when own occupation is used (professionals can get higher individual policies, up to 25k, than group policies, which usually max at 8k)

A

professionals (doctors engineers), self-employed, low risk occupation, high motivation, working indoors, no heavy machinery. they get the best coverage at the lowest costs, because they are unlikely to have claims and return to work is very likely. 2 year own occupation (more common) or lifetime. coverage for both injury and illness 24hr coverage. strong effort to return to work, lots of underwriting.

70
Q

regular occ

A

maybe own occ isnt available. regular occ covers if you can’t return to a job that is within your range of skills, education or experience. contracts are messy. reg occupation tops you up to pre-disability income if you return to work.

regular occupation covers office workers, minimal heavy equipment, indoor work, planner, engineer, accountant. skilled work. inury and illness coverage, riders may be available to bump up a class.

71
Q

lower occupation classes (any occupation)

A

heavy equipment, outdoor work ,driving, dangerous environment, physical risk (esthitican or hair dresser), unstable or erratic income. injury only, illness only, non occ only, no soft tissue claims, no mental health claims, sell a monthly benefit, underwrite income at time of claim. riskiest group. has least options and worst coverage.

72
Q

business overhead expense

A

business owner, tax deductible, lower premiums, fixed and contractual expenses, deductible business expense, limited benefit period, taxable when received but can be offset by expenses

73
Q

professional series policy waiting/elimination period and benefit period

A

90-120 days waiting, benefit until age 65. no point in lifetime insurance really, that means you’re insuring retirement. you can use a shorter benefit period but whats the risk/discount payoff. is it worth it?

74
Q

sequence of payor

A

cpp disability, ei, auto policy, workers comp, provincial disability, group coverage (assumes 1/3 of claims will be under workers comp), individual coverage.

75
Q

WI (short term disability)

A

1-8 day waiting period, 15-52 weeks of coverage (normall closer to 15). regular occ, claims are generally easy. employer paid means taxable, and you receive 75%. short list of exclusions.

76
Q

LTD group coverage

A

66.7% non-taxable im employee pays. 75% if employer pays. 2 year own occupation then any occupation. 1/3 of claims end at 2 year mark
pre-existing condition limitations - (for treatment or diagnosis within 90-180 days of start date), claim would be denied in 1st 1-2 years after coverage starts (related to that condition). there can be exclusions for mental health, self-inflicted, act of war, commission of a crime, hazardous activities

77
Q

non evidence max and plan max group

A

no medical underwriting usually around 3k. 6k-8k for plan max. if premiums arent paid on bonuses/ot, that income wont be reflected in coverage

78
Q

assignment of insurance contracts

A

can rollover policy to child or grandchild (or parent) without taxable event if the child/grandchild is the life insured. beneficiary can be changed by policy holder

79
Q

collateral assignment for loan (taxes and uses)

A

not common. usually only done with business lending and farm lending. premium is deductible if its for investment, from authorized lender, required as condition of the loan. can deduct ncpi or premiums paid, whichever is lower. grandchilds estate is automatically beneficiary when they receive it and child is automatically beneficiary until they change it.

80
Q

Health care expenses not normally covered

A

prescription drugs, dental (except emergencies), chiro, massage, naturopath, ambulance, air ambulance, vision care (except minors and seniors), elective/experimental surgery (usually not covered under private or public), out of province/country (see later point)

81
Q

Health Spending Account types

A

insurer has a 70% targeted loss ratio. if expected costs are 1800, premiums will be 2600. family can pay premiums in individual policy and they are eligible for medical expense tax credit. group plan and health spending account both allow employer to deduct premiums and employee (can be self employed) receives tax free benefit

82
Q

How insurer can keep costs down

A

generic drugs only, limits to certain coverages, dispensing fee, fee schedule for dental, pre-defined list of drugs to be covered, max coverages for dental, vision etc in given year

83
Q

When underwriting is required for group benefits

A

small groups (less than 5), join the plan late (unless there is a material change in circumstance ie child/marriage), exceeds

84
Q

How insurer develops premiums (new and existing groups)

A

new - ages of employees, marital status, children, employee earnings, industry, geography

85
Q

Who isnt covered?

A

contractors, part time, seasonal, non residents of canada (some carriers may offer this).

must be employed full time, paying premiums, out of probation, active at work, completed enrollment paperwork

86
Q

Contract is between inurance company and employer/union, if there is a claim, plan member can treat insurer as if there is a contract. a benefits booklet is not a contract

A
87
Q

group benefits

A

life (1x, 2x, 3x, salary) can convert to individual, taxable benefit. suicide is exclusion (maybe)
a d and d - lots of exclusions, rarely pays, taxable benefit
critical illness - 15k-50k - sometimes 2.5k-5k for dependents, taxable benefit, some convertible products
dependent life - 10k for spouse, 5k for children
HSA, no taxable benefit, $250-5k.
Wellness account - taxable benefit
employee assistance - non taxable, counselling
cost plus - iffy from tax perspective non taxable in theory

CFP (28 decks)

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