Insurance Flash Cards

Question 1

Elements of Insurance

Answer 1

• 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)

Question 2

What is Peril?

Answer 2

The cause of a loss, the event insured against:

Fire
Windstorm
Theft
Etc.

Question 3

What is a Hazard?

Answer 3

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

Question 4

What is Risk?

Answer 4

A condition where there is a possibility of loss (a situation where exposure to loss exists).

* Starting a business
* Buying real estate

Question 5

What are the Methods to Avoid/Reduce Loss?

Answer 5

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

Question 6

What are two methods of Calculating Life

Insurance needs

Answer 6

• 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).

Question 7

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

Answer 7

• A.M. Best: A++ to F

* Standard &Poor: AAA to CCC

Question 8

What is a Modified Endowment Contract (MEC)?

Answer 8

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

Question 9

Grandfathered MEC rules

Answer 9

• If death benefit increases by $150k or less and the insured has guaranteed insurability (no proof of insurability), the poloicy 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.

Question 10

When are the proceeds in a life insurance policy taxable due to Transfer for Value?

Answer 10

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
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

Question 11

Buy Sell
Stock Redemption
vs
Cross Purchase

Answer 11

Stock Redemption: No Step up in cost basis

Cross-Purchase: Step up in basis

Question 12

Split Dollar Insurance
EndoRsement Method
vs.
Collateral aSSignment Method

Answer 12

EndoRsement Method:
EmployeR is the owneR
Employee is not a shareowner

Collateral aSSignment method:
Employee is owner
Employee is a Shareholder
Employee aSSigns the policy

Question 13

Annuity Taxation

Answer 13

Periodic Payouts:

Payout ÷ Basis = Tax-free

Lump Sum Payouts:

LIFO (interest first rule)
Ordinary income plus 10% penalty if under 59½

Question 14

Insurable Interest

Answer 14

Property and Casualty: At inception and at time of claim

Life: At inception, but need not be at time of claim

Question 15

Parts of an Insurance Contract

Answer 15

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.

Question 16

Negligences

Answer 16

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)

Question 17

Defenses

Answer 17

• Assumption of risk
• Contributory
• Comparative
• Last Clear Chance

Question 18

What are Sections of a Homeowner’s Policy and what do they cover?

Answer 18

Park I
• A – Structures
• B – Unattached improvements
• C – Contents
• D – Loss of use
Part II
• E – Liability
• F – Medical payments

Question 19

Basic Form Perils Covered

Answer 19

WHARVVES/FLT

Question 20

Broad Form Peril Covered

Answer 20

Rupture of a system
Artificially generated electricity
Falling objects
Freezing of plumbing

Study Hint
Remember: Basic plus RAFF

Question 21

What is the formula for Replacement Cost Coverage

Answer 21

Replacement Cost x Coinsurance Percentage = Insurance Required

Insurance Carried ÷ Insurance Required x Loss -Deductible = Amount Paid by Insurance

Question 22

Homeowner’s Forms of Coverage

Answer 22

HO-1, HO-2, HO-3, HO-4, HO-6, HO-8

Question 23

Homeowner’s Policy Exclusions

Answer 23

OPENN/WIF – Sinkhole – YES!

Question 24

What property is excluded under

Personal Property Coverage?

Answer 24

• Animals, Fish, Birds
• Vehicles, boats, planes
• Property of renters
• Items in rental unit

Question 25

Parts of an Auto Insurance Policy

Answer 25

A – Liability
B – Medical
C – Uninsured motorist
D – Damage

Question 26

What is classified as a “Covered Auto” under an auto insurance policy?
What is classified as a covered auto?

Answer 26

• Vehicle listed in dec page
• Car, truck, van not used for business acquired within 14 days
• Trailer – Rented or owned
• Vehicle rented to use when listed vehicles being serviced

Question 27

What are the requirements for a vehicle to be eligible for:
Insurance Serivces Office (ISO)
Personal Auto Policy (PAP)

Answer 27

• Owned by individual or couple living in same house
• Any passenger vehicle
• Car, Truck, Van purchased within 14 days
• Not used for business or livery

Question 28

Who are the Persons Insured under medical payments coverage of the PAP?

Answer 28

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)

Question 29

Uninsured Motorist Coverage

Answer 29

• Used to replace liability that uninsured motorist should have had
• Liability, not medical

Question 30

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

Answer 30

• Glass breakage
• Hitting animals
• Falling Objects
• Rain
• Hail
• Earthquakes
• Flood
• Etc

Question 31

What are the benefits of an Umbrella Liability Insurance?

Answer 31

• Nearly always a correct answer since it is smart coverage
• Provides liability coverage (BI/PD) for catastrophic claims
• Requires policy owner to carry certain underlying coverage of specified amounts
• Professional acts are specificially EXCLUDED

Question 32

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

Answer 32

Malpractice - Bodily Injury (doctors, dentists)

Errors and Omissions (E&O) - Monetary damages (financial advisors, lawyers, accountants, insurance agents)

Question 33

What is covered by Workman’s Comp?

Answer 33

• Unlimited medical expenses
• Diability Income (TAX FREE)
• Death Benefits
• Rehabilitation (medical and vocational)
• Absolute Liability

Question 34

HSA

Answer 34

• Used with high deductible plan - $2500+/family, 1250/single
• Extra contrib for 50+
• Distributions are tax free if used for health care
• Contributions not spent are carried forward and portable
• Deductible for AGI
• Not eligible if on Medicare
• Can be used to pay COBRA premiums, LTC premiums
• Heath insurance premiums while receiving unemployment
• If used for non-qual, must pay income tax and 20% penalty if < 65, deceased, or disbaled
• Unused assets become property of named bene on death

Question 35

MSA (Archer Medical Savings Account)

Answer 35

• Existed prior to HSAs

* For employers with < 65, deceased, or disabled

Question 36

Heath Reimbursement Arrangement

Answer 36

• Employer contribs

* At termination, balance reverts back to employer

Question 37

Voluntary Employees Beneficiary Association (VEBA)

Answer 37

• Can provide Life, Sickness, Accident, Other benefits for employees or ex-employees
• Only <10% employees can be terminated employees
• No retirement, commuter benefits
• Employer can deduct, Employee can exclude from income

Question 38

What are the characteristics of a

Flexible Spending Account (FSA)

Answer 38

Must be used by March 15th or forfeited to the company (use it or LOSE it - Medical Only)
Not subject to income tax, FICA or FUTA
Health FSA may not be used to reimburse an 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.

Question 39

What are the COBRA coverage requirements and

qualifying events?

Answer 39

• Must have 20 full/part time employees.
• Includes vision and dental
• The option to buy continuation:

Coverage must be offered to: (and what’s the 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

Question 40

Medicare does NOT cover…

Answer 40

Routine foot care, glasses, hearing aids and dental

Emergency care outside the US (except Canada, Mexico and Caribbean)

Question 41

Explain the limitations of Medicare’s Long Term Care coverage

Answer 41

• 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

Question 42

Definition of Disability

Answer 42

• Own Occupation - best definition for the insured
• Modified any occupation
• Split definition - Own then modified
• Any Occupation (Social Security definition)
• Loss of Income

Question 43

Taxation of premiums and benefits for Disability Policies

Answer 43

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

Question 44

What are the Policy Continuation Provisions for

Disability Income?

Answer 44

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

Question 45

Permanent Life Insurance

Low Risk Tolerance

Answer 45

Insurance company controls the investment return
Assets part of the general account

Whole Life
Universal Life

Question 46

Permanent Life Insurance

High Risk Tolerance

Answer 46

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

Question 47

What are the 1035 Tax Free Exchange Rules?

Answer 47

Anything that delays payment of taxes is not allowed
• Annuity → Annuity OK
• Life → Annuity OK
• Life → Life OK
• Annuity → Life No
• Endowment → Life NO

Question 48

Dividend Options for Life Insurance

Answer 48

CRAPO

• Cash
• Reduced premium
• Accumulate with Interest
• Paid-up additions
• One-year term / 5th dividend

Question 49

Non-forfeiture Options

Answer 49

• Cash
• Extended Term
• Paid Up Reduced Amount

Question 50

What are the Life Insurance Settlement Options?

Answer 50

• Cash
• Pure Life / Single Life
• Refund
• Period Certain
• Specified income / period
• Interest only

Question 51

Group Term Life Insurance

Answer 51

• May discriminate as long as one of four tests is passed:

• 70% of employees are covered
• Key employees do not exceed 15% of participants
• Must benefit non-discrim class of employees i.e. rank/file
• If part of cafeteria plan

First $50k in benefits are tax-free except to key employees

Can be converted to individual plan at termination WITHOUT proof of insurability – has 31 days after termination. Rate will be market rate

Section 162 Bonust Plan
• All premiums are taxable to employee
• Usually employee gets bonus to cover taxes on premiums

Question 52

GULP

Answer 52

Group Universal Life Plan
• No evidence of insurability required
• Usually part term, part universal life
• Employer pays premium for term, employee UL
• Can provide insurance for spouse and children
• Employer paid premium is taxable to employee

Question 53

What are the major Tax Free Fringe Benefits?

Answer 53

• Parking ($250) / Commuting ($130)
• Heath Insurance
• Term life (up to $50k) – non-discriminatory
• Company Car
• Occasional meals, cab fare, theater/sporting tickets
• Discounts on services limited to 20% discount

Question 54

When are Fringe Benefits taxable?

Answer 54

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.