Insurance Lesson 2 Flashcards
Needs Approach:
Income replacement & lump sum needs
*Any future cash or income needs should be discounted using the PV of that future cash flow
Human Life Value Approach
Future earnings minus self-maintenance costs
Term Life Insurance:
Types:
Pure insurance
Annual Renewable Term
Level Term
Decreasing
Appropriate Uses of Term Life Policies:
Temporary needs: education funding, debt payments, grieving process expenses
Appropriate Uses of Whole Life Insurance:
Lifetime/permanent needs
Estate planning purposes for liquidity
Investment like performance/returns
Types of Whole Life Insurance:
Ordinary (Whole) Life
Limited Pay Life
Variable Life
Current Assumption Whole Life
Current Assumption Whole Life:
Insurer can __?
Lo CAWL:
Hi CAWL:
Insurer reserves right to adjust premium once
Lo: low premium assuming higher interest rate (interest sensitive/creates demand)
Hi: assumes lower interest rate resulting in higher premium
Example Exam Question:
30 years old. Single mom (age 9). $25,000 income. Zero net worth. 2 objectives: provide for child in event of her death, invest for retirement.
Which should she purchase?
A. Whole Life
B. Universal Variable
C. Variable Whole Life
D. Term Life
D
First to Die vs Last to Die
First: provide for survivor, life expectancy less than either single life
Last: estate needs, life expectancy greater than either single life
Participating (pay dividends):
Dividend Options:
CRAPO
Cash
Reduce premiums
Accumulate at interest: company invests dividends
Paid up additions: purchases additional insurance
One-Year Term: adds term insurance to policy face amount equal to cash value of policy
Annuity Payment Options:
Fixed Amount Life Income Fixed Period Life Income with Period Certain Joint & Last Survivor Income
Nonforfeiture Options:
Cash Surrender Value
Reduced Paid-up Insurance
Extended Term Insurance
Accelerated Death Benefits:
Terminally ill (<24 months) Lump sum or monthly income
Universal Life Insurance:
Adjustable?
Who invests?
Premium payment option?
Yes, flexible
Insurer
Cash value can be used to pay premiums
Universal Life A:
If cash value gets high enough, death benefit will increase
Universal Life B:
Death benefits vary directly with cash value
DB = face amount + cash value
Variable Universal Life:
Investment options directed by insured
No minimum guarantee
Example Exam Question:
35, 2 kids (3&5), high income. Little savings. Risk averse. Which would provide savings component, permanent protection, & match risk tolerance?
A. Level term
B. Variable universal
C. Variable life
D. While life
D
Non Direct Recognition vs Direct Recognition:
Non: dividends not adjusted based on loan
Direct: dividends reduced by loan outstanding
Grace Period:
__-__ days
31-61
Pay death benefit minus premium due
Example Exam Question:
45, says 30. Buys $1M term. Premiums $1 per thousand. Premiums should be $2.5 per thousand. Which is correct?
A. Benes will collect $0 but get premiums back since Cindy died
B. Benes will collect $1M as long as death was accidental
C. Benes will collect $400k which is policy value with premiums adjusted for actual age
D. Policy is voidable up to 2 years by insurance company for fraud
C
Assignment:
Absolute:
Collateral:
Absolute: all policy ownership rights
Collateral: limited ownership rights, terminates when debt satisfied, use direct recognition reducing dividends & interest for portion of cash value used as collateral
Group Term Life: First $\_\_\_ of coverage is tax free? Premiums paid by employer are \_\_\_? Premiums paid by employee are \_\_? Income must be \_\_?
$50,000
Tax deductible
Paid with after tax dollars
Imputed based on excess coverage
Group Whole Life:
If premiums paid by employer __?
Taxable income to employee
Cons to Annuities:
Not appropriate to leaving assets for heirs
Not a hedge against inflation
Types of Annuities:
Immediate Deferred Flexible Premium Deferred Annuity (FPDA) Single Premium Deferred Annuity (SPDA) Fixed Annuity Variable Annuity Equity Indexed Annuity
Equity Indexed Annuity: Form of \_\_? Linked to \_\_? Limits \_\_? Index Term? May have \_\_\_ rate or \_\_ rate or \_\_ rate? Indexing Methods?
Fixed annuity Index (usually S&P500) Limits downside risk 1-10 years (interest credited at end) Participation or Cap or Floor Crediting Annual reset/ratcheting method, high watermark approach, point to point method
Which is taxable when exchanging?
Annuity for Life Insurance
Modified Endowment Contracts:
Becomes a MEC if __?
Withdrawal penalty is __% before age __?
Withdrawals & loans taxed from __ basis?
Fails 7 pay test
10% penalty before age 59.5
LIFO
Transfer of Policy for Value:
DB taxable to transferee to extent __?
Exceptions:
Proceeds exceed basis
Transferred to insured/business partner, partnership, corporation in which insured is shareholder or officer, transfer results in carryover basis from transferor to transferee
Taxable Income for Life Insurance/Annuity
Calculate exclusion/inclusion ratio
Example Exam Question: Principal paid: $200,000 Annuity valued at $360,000 Annuity payment calculated at $24,000/year Retire @ 65, IRS multiplier is 15 What amount is excluded from tax?
A. $1,111 until principal amount exhausted
B. $889 for life of annuitant
C. $1,111 for life of annuitant
D. $889 until principal amount exhausted
A
Activities of Daily Living:
Eating Toileting Transferring Bathing Dressing Continence
Example Exam Question:
Walter terminally ill. 20 year term policy. Face amount $500,000. Paid $15,000 premiums over last 10 years. Sells to Viatical for $400,000. What is tax impact to Walter & Viatical company at Walter’s death?
A. Walter: $385,000. Company: $100,000
B. Walter: $400,000. Company: $100,000
C. Walter: $0. Company: $100,000
D. Walter: $0. Company: $500,000
C
Taxation of Annuities:
Before 1982:
After 1982:
FIFO
LIFO
Example Exam Question:
62. Annuity worth $100,000. Purchased 35 years ago for $15,000. Needs additional insurance on husband. Which is most appropriate strategy to provide additional life insurance on husband using annuity?
A. Annuitize & purchase life insurance on husband
B. Surrender annuity & purchase life insurance
C. Exchange annuity for post1987 annuity then exchange for life insurance
D. Exchange annuity for life insurance
A
Medical Expense Categories: Hospital: Surgical: Physician’s: Major medical:
Hospitalization: does not cover physician fees, only hospital stay
Surgical: surgeon fees in or out of hospital
Physician’s: all non surgical physician expenses
Major medical: hospitalization, physician & surgeon fees, physical therapy, & prescription drugs
Example Exam Question:
Group medical policy. $250 deductible, 80/20 coinsurance, max out of pocket $1,000. Accident totaling $6,350. How much will he pay?
A. $1,000
B. $1,250
C. $1,450
D. $8,000
A
Patient Protection & Affordable Care Act (PPACA):
Those without health insurance pay greater of $__ up to a maximum of 3 times that amount per family OR __% of household income above filing threshold
No penalty after __
Employers of more than __ full time
Requires employers to automatically enroll when more than __ full time employees
4 benefit categories:
$695 per year or 2.5% 2018 50 200 Bronze: 60% (minimum coverage) Silver: 70% Gold: 80% Platinum: 90% *Catastrophic plan available on individual marketplace up to age 30
Health Maintenance Organizations (HMOs):
Definition
Gatekeeper
Disadvantage
Comprehensive health care for premium
Primary care physician
No coverage outside of HMO
3 Structural Models of HMO
Staff: HMO is corporation & medical staff are employees of HMO
Group: network model, HMO contacts with groups of medical providers to care for insured plan subscribers
Individual Practice Association: physician’s have own office location, contract out to HMO on fee-for-service basis
Preferred Provider Organizations (PPOs)
Network of healthcare providers
Offers discount on services
Insured receives high rate of reimbursement
Insured will suffer penalty for seeking care elsewhere
Managed Care (Primary Care Physician - PCP)
Physicians need approval for certain procedures
Consumer has small copayment or deductible
Health care providers agree to accept compensation provided under plan
Health Savings Accounts (HSAs)
Tax deductions for contributions Tax-free qualifying expenses Employer & employee May contribute Must have HDHP Medicare disqualifies
HSA Contribution Limits & Catch Up
Deductible minimum: $1,400
Out of pocket max: $7,050
Contribution: $3,650
Age 55: $1,000 catch up
Health insurance premiums are only permitted as qualified medical expenses from HSA for the following exceptions:
LTC COBRA Health care while receiving unemployment Medicare & other health after age 65 Dental/Orthodontics & vision care
Distributions for non-qualified before & after age 65
Before: income tax & 20% penalty
After: income tax
Health insurance policies are:
Noncancellable: cannot raise premiums or cancel, guarantee right to renew
Guaranteed renewable: can raise premiums but cannot cancel, right to renew for period of time, all policies must now be GR
Coordination of Benefits Clause
Cannot collect more than 100% of actual expenses incurred
Health Insurance Portability & Accountability Act (HIPPA)
Protect worker’s ability to obtain health coverage when changing jobs, laid off, retiring
Obtain coverage without restrictions from one group plan to another (not group to individual or individual to individual)
12 month exclusion window (18 for late enrollment)
HIPPA Creditable Coverage
Any health coverage held immediately prior to applying in new plan & after any significant breaks in coverage (63+ days)
Consolidated Omnibus Budget Reconciliation Act (COBRA):
Employer May charge __% admin fee
Eligibility:
Only applies to employers who:
2% admin fee Group coverage must terminate because: Covered employee dies Employee terminated Hours reduced from FT to PT Covered employee separates from spouse Employee eligible for Medicare Dependent no longer eligible for coverage
Offer group plan & have 20+ full time employees (PT employees count as fractional)
If there is no longer a health plan,
There is no COBRA coverage available
Employer must offer coverage for time based on qualifying events:
18 months for reduction in hours/termination
36 months for death/divorce/Medicare eligibility/loss of dependency status
Up to 29 months if employee meets SS definition of disabled
Employees have __ days to make COBRA election
60 days
Example Exam Question:
Phil employed at company over 5,000 employees. Had family coverage in group plan. Phil died. Which is correct based upon COBRA election for Phil’s dependents?
A. Paul’s wife/minor children eligible for 18 months
B. Wife/minors 36 months
C. Wife/minors not eligible
D. Wife/minors 29 months
B
Example Exam Question:
25 employees. Only 15 covered under group health plan. Which is true?
A. Not required because only 15 employees participate in group health plan
B. Requires because 20+ employees
C. Allowed to charge 105% premium to COBRA electors
D. Can offer COBRA to employees not participating in group health plan
B
COBRA coverage may be terminated before term ends if:
Employer terminated health plan for all employees
Employee/beneficiary fails to pay premiums
Employee becomes covered under any other plan providing medical care
Long Term Care Options:
Medicaid
Medicare
Continuing Care Retirement Communities
Private LTC Policy
Medicaid
Available to nation’s poor; based on assets
Benefits paid by government at federal or state level or combination
May be penalty for assets gifted in 5 years proceeding nursing home entry (will be assessed in formula)
Medicare
Available to those eligible for SS
Benefits extremely restrictive
Only pays if capable of improvement of condition
Continuing Care Retirement Communities:
Offers: Independent living Assisted living Memory care Skilled nursing & rehabilitation
Private LTC Policy:
7 Types of Coverage:
Skilled nursing: traditional nursing home, physician ordered
Intermediate nursing: occasional care, physician ordered
Custodial: assistance with eating, dressing, bathing, etc
Home: in home assistance
Assisted: apartment style with healthcare services
Adult day care: daily assistance while spouse/family member works
Hospice: terminally ill
Private LTC Eligibility
Chronically ill: unable to perform 2/6 ADLs
Substantial cognitive impairment: behavior threatens own/others safety
LTC Insurance Partnership Program
Establishes eligibility rules between individual LTC policy & Medicaid
Use LTC first then Medicaid without spend down requirement
Asset disregard equal to amount paid from policy
LTC Tax Benefits
Premiums tax deductible & limited based on age of insured
Qualified benefits tax free
Qualified: care for at least 90 days, unable to perform 2/6 ADLs, substantial cognitive impairment
Example Exam Question:
Which is correct?
1. LTC policies designed to pay for skilled nursing, intermediate, custodial, & home care
2. LTC policies designed to provide coverage for major medical expenses including extended care in ICU
3. LTC policy must be non-cancelable to qualify for deductibility
4. Cap on amount of LTC premiums that can be deducted
A. 1,2
B. 1,4
C. 2,3
D. 3,4
B
Disability Income Insurance Policy Issues:
Coverage (sickness & accident) Term (to retirement or to death) Elimination period (0-180 days) Taxability (depends on payor) Amount of benefits (60-70%) Definition (own occupation, etc) Residual benefit Probation period
Definitions of Disability: Any occupation: Modified own occupation: Own occupation: Split definition:
Any: if cannot perform duties of any occupation, least expensive premium
Modified: if unable to perform duties of gainful occupation reasonably fitted for
Own: if unable to perform duties of own occupation, more expensive, for highly specialized/high paying fields
Split: begins with own, moves to modified after a year or 2
Benefit period:
Short:
Long:
Short: 2 years or less
Long: until normal retirement age, death, or specified time period
During waiting period:
Premium typically waived
Serves as a deductible
Taxation of Benefits:
If employee pays with after-tax:
If employer pays premium:
If employee pays with pre-tax (cafeterias plan)
EE After Tax: premiums not deductible, benefits tax free
ER: premiums deductible to ER, benefits taxed to EE
EE Pre Tax: benefits taxed
Cost of Living Rider:
Residual Benefits:
Adjust for inflation
If insured goes back to work for less pay, policy will pay difference between current income & income prior to disability
Example Exam Question:
Earns $18,000/month. Disabled under own occupation with 50% prior wages clause. Works making $3,000/mo (reduction of 83.33%). Residual benefit provision of $12,000. What will total income per month be including residual benefit?
A. $3,000 one time payment
B. $12,000 greater of salary or disability benefits
C. $13,000 ($3,000 plus $10,000 from residual)
D. $15,000 ($12,000 plus $3,000)
C
Any disability benefits received by SS will __ disability benefit paid by insurer
Probation period typically __-__ days after inception
Reduce
15-30
Look at page 182 in fundamentals & insurance
Tax implications table
Lesson 2 Review:
Which of the following life insurance policies provides the highest benefit with the lowest premium and is simply a pure death benefit policy?
A. Term
B. Whole life
C. Universal life
D. All
A
Lesson 2 Review:
Kyle, 33, married, newborn. Concerned about providing for family in event of premature death. Concerned about long term affordability of life insurance but is able to budget fixed amount for a period of time. Which would you recommend?
A. Annual renewable term
B. Level term
C. While life
D. Single premium annuity
B
Lesson 2 Review:
Ryan & Jody 68 & 70. Significant assets that will be subject to estate taxes upon second spouse’s death. Which would you recommend?
A. Annually renewable term
B. Second to die whole life
C. First to die whole life
D. Ordinary whole life
B
Lesson 2 Review:
Which of the following contain cash value savings component that reaches face value of policy at age 120?
A. Term
B. Whole life
C. Universal life
D. Lifetime annuity
B
Lesson 2 Review:
Which has fixed premium, cash value, death benefit that can fluctuate based on investment performance?
A. Annually renewable term
B. Variable renewable term
C. Variable whole life
D. Variable lifetime annuity
C
Lesson 2 Review:
All are true about whole life except:
A. Level premium whole life accumulate cash value that reaches face value at age 120
B. Whole life offers permanent protection throughout insured’s life time
C. Whole life can be participating meaning insured must participate in self-directed investments for the cash value
D. Whole life premiums paid through insured’s lifetime are ordinary life policies
C
Lesson 2 Review:
All true concerning universal life except:
A. Insured has flexibility to adjust premiums, face value, and cash value of policy
B. Insured has flexibility without investment responsibility of cash value
C. Cash value can be used to pay premiums
D. Death benefit is fixed
D
Lesson 2 Review:
All of the follow are true regarding annuities except:
A. Deferred annuity provides income to the beneficiary at some date in the future
B. Flexible premium annuity provides insured with flexibility to vary premium payments
C. Joint & survivor annuity is an ideal way for parents to leave assets to children
D. Annuity benefits consist of both return of basis & taxable income
C
Lesson 2 Review:
Receiving annuity payments of $1,500 per month. Life expectancy 20 years. Purchased annuity for $200,000. What is taxable income each year?
A. $833
B. $667
C. $8,000
D. $10,000
C
Lesson 2 Review:
Receiving annuity payments of $1,500 per month. Life expectancy 20 years. Purchased annuity for $200,000. What is return of basis each year?
A. $833
B. $667
C. $8,000
D. $10,000
D
Lesson 2 Review:
Receiving annuity payments of $1,500 per month. Life expectancy 20 years. Purchased annuity for $200,000. Lived beyond 20 years. What is taxable amount each year?
A. $833
B. $18,000
C. $8,000
D. $9,996
B
Lesson 2 Review:
Major medical policy. $250 deductible. 80/20 coinsurance. $2,000 stop loss. Surgery costs $8,000. How much will he pay?
A. $250
B. $1,600
C. $1,800
D. $2,250
C
Lesson 2 Review:
Major medical policy. $250 deductible. 80/20 coinsurance. $2,000 stop loss. Surgery costs $12,000. How much will he pay?
A. $250
B. $2,000
C. $2,250
D. $2,600
C
Lesson 2 Review:
All true regarding disability insurance except:
A. Longer elimination period less expensive policy
B. Own occupation policy will provide benefits if insured is unable to perform duties of own occupation
C. Any occupation policy is less expensive than an own occupation policy
D. Residual benefit clause provides insured with benefits that extend beyond disability period
D
Lesson 2 Review:
All following are true except:
A. Employer allowed to charge up to 102% health insurance premium
B. COBRA must be offered because of voluntary or involuntary termination of employee or reduction in hours from full time to part time
C. Termination of employment requires 36 months coverage
D. Divorce or legal separation required 36 months coverage
C
