Insurance Planning

Question 1

Perils

Answer 1

• Perils are the actual cause of a loss.
• For example: Fire, wind, tornado, earthquake, burglary, and collision.

Question 2

Hazard Definitions

Hazard

Moral Hazard

Answer 2

• A hazard is a condition that increases the likelihood of a loss occurring.
• There are three types of hazards: Moral, Morale, and Physical Hazard.

1. Moral Hazard.

• A moral hazard is a character flaw.
• A character flaw would lead to a filing a false claim.
• For example: A famous running back for Ohio State claimed his car was broken into and $10,000 worth of CD’s were stolen. There certainly wasn’t $10,000 worth of CD’s in his car and thus is an example of a moral hazard.

Question 3

Hazard

Morale Hazard

Physical Hazard

Answer 3

1. Morale Hazard.

• Morale hazard is the indifference created because person is insured.
• For example: Beth goes to the convenience store to get milk for her baby Hudson. Beth leaves the keys in her car and the car running while she goes into the store, not concerned that her car may get stolen because she has car insurance.

1. Physical Hazard.

• A physical hazard is a tangible condition that increases the probability of a peril occurring.
• For example: Icy or wet roads, poor lighting, or defective equipment.

Question 4

Adverse Selection

Answer 4

Adverse selection is the tendency of persons with higher-than-average risks to purchase or renew insurance policies.

Adverse selection is managed through underwriting, denying insurance on the front end, and raising premiums on the back end.

Question 5

What are the requisites for an insurable risk?

Answer 5

• A large number of similar exposure units.
• Losses must be accidental from insured’s view.
• Cannot insure moral hazards because premiums would skyrocket.
• Losses must be measurable and determinable so that the insurer can accurately forecast actual losses.
• For example: It’s easy to determine the value of a house or auto, but it’s difficult to determine amount of cash in a wallet; therefore, coverage is limited. - Losses must not pose a catastrophic risk for the insurer.
• An insurer cannot provide coverage that would cause it to become financially insolvent.
• The premiums must be affordable.

Question 6

Elements of a Valid Contract

Answer 6

• One party must make an offer and the other party must accept that offer.
• The signing of an insurance application and paying the first premium may be considered offer and acceptance.
• There must be legal competency of all parties involved in a contract.
• Both parties must be 18 or older; otherwise, the contract is voidable by the minor.
• There must be legal consideration. Consideration is whatever is being exchanged. It can be money, services, or property.
• A promise to pay (insurer) and actual payment of a premium (insured).
• The contract must pertain to a lawful purpose.
• Insurance contracts that promote actions that are illegal are invalid.

Question 7

What are the three Legal Principles of Insurance Contracts?

Answer 7

• The Principle of Indemnity
• Subrogation Clause
• The Principle of Insurable Interest

Question 8

The Principle of Indemnity

Answer 8

• An insured is only entitled to compensation to the extent of the insured’s financial loss.
• An insured cannot make a profit from an insurance contract.

Question 9

Subrogation Clause

Answer 9

• The insured cannot receive compensation from both the insurer and a third party for the same claim.
• If the insured collects compensation from their insurance company, they lose the right to collect compensation from the third party.

Question 10

The Principle of Insurable Interest

• Life Insurance
• Property and Liability Insurance

Answer 10

An insured must have an emotional or financial hardship resulting from damage, loss, or destruction.

Property and Liability Insurance – the insured must have insurable interest at time of policy inception and at time of loss.

Life Insurance – the insured only need insurable interest at time of policy inception.

Question 11

Warranty

Representation

Concealment

Answer 11

• A warranty is a promise made by the insured to the insurer.
• A breach of warranty is grounds for avoidance by the insurance company.
• Representations are statements made by the insured to the insurer during the application process.
• There must be a material ‘misrepresentation’ to void an insurance contract.
• Misrepresenting age on a life insurance application is not material misrepresentation.
• When the insured is silent about a fact that is material to the risk.

Question 12

Adhesion

Answer 12

An insurance policy is basically, “take it or leave it.” There are no negotiations over terms and conditions.

As a result, any ambiguities in an insurance contract are found in favor of the insured.

Question 13

Aleatory

Answer 13

The money exchanged may be unequal. In other words, there’s a small premium, but the insured may receive a large benefit.

Question 14

Unilateral

Answer 14

• Only one promise made by the insurer which is to pay in the event of a loss.
• The insured is not obligated to pay the premiums. If the premiums are not paid, then there’s no promise by the insurer.

Question 15

Express Authority

Answer 15

Which is given through an agency or written agreement.

The insurer is responsible for acts of an agent based on express authority.

Question 16

Implied Authority

Answer 16

• Implied authority is the authority that the public perceives.
• The actual delivering of an insurance contract and accepting a premium is an example of implied authority.
• The insurer is still responsible even if a client is misled.

Question 17

Apparent Authority

Answer 17

• Apparent authority is when the insured believes the agent has authority to act on behalf of the insurer when in fact, no authority actually exists.
• Apparent authority could be inferred based on business cards or a sign on the wall, but the agency agreement actually expired.
• If an agent represents that insured can purchase a policy from an insurance company that has not renewed that agent’s agreement, they may still be held responsible.

Question 18

Insurance Rating Agencies

Answer 18

A.M. Best’s

• Highest Rating: A++ to A/A-
• Lowest Rating: C/C- to D

Moody’s

• Highest Rating: Aaa to Aa1/Aa2
• Lowest Rating: B1/B2/B3 to Caa

Standard and Poor’s

• Highest Rating: AAA to BBB
• Lowest Rating: BB and lower CC

Question 19

National Association of Insurance Commissioners (NAIC)

Answer 19

• Provides a watch list of insurance companies based upon financial ratio analysis. - Ratios measure the financial health of insurance companies.
• NAIC has no regulatory power over the insurance industry, but is involved in accrediting state insurance regulatory offices.

Question 20

What are the five dividend options?

Answer 20

1. Cash – clients receive the money and can use it or invest it as they wish.
2. Accumulate at Interest – the company invests the dividends and they are tax-free up to the client’s basis in the policy. Interest paid on the dividends is taxable.
3. Reduce Premiums – decreases the out of pocket expense for premiums.
4. Paid-up Additions – purchases additional insurance each year for insured regardless of health or occupation.
5. One-year Term – adds term insurance each year to the policy face amount equal to cash value of the policy. Also known as the 5th dividend option on the CFP® Exam!

Question 21

Life Insurance Nonforfeiture Options

Answer 21

Cash Surrender Value

• Insured receives the accumulated cash value when terminating the life insurance policy. The cash surrender value is the cash value less surrender charges.

Reduced Paid-up Insurance

• Insured receives the cash value in the form of a paid-up policy with a smaller face amount.

Extended Term Insurance

• The insured receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.

Question 22

Define Absolute Assignment and Collateral Assignment

Answer 22

Absolute Assignment

The owner transfers all policy ownership rights.

Collateral Assignment

Collateral assignment is used for collateral on debt, which only assigns limited ownership rights.

The assignment automatically terminates when the debt is satisfied.

Question 23

Taxation of Life Insurance

Answer 23

Death benefits are generally excludable from taxable income.

• Exception is the “unholy trinity” where the insured, beneficiary, and owner are all different. If the insured dies under an “unholy trinity” policy, then the owner of the policy has made a taxable gift to the beneficiary.

DIVIDENDS OF LIFE INSURANCE:

1. If dividends are distributed then they reduce the basis and will be taxable when they exceed basis.
2. If Divs are left in the policy, then they do not reduce basis, they can either be put into the cash value or offest the premiums.
3. If you choose to invest them in the insurance company’s separate account, then the interest on them is taxable.

4

Loans against life insurance are tax-free. However, the exception is if the contract is MEC. If a contract is deemed a MEC any loans or withdrawals will be treated using the LIFO method. (How a policy becomes a MEC is defined in the next section.)

Exchanges for one life insurance policy to another or annuity, does not create a taxable event.

Exchanging an annuity for life insurance creates a taxable event.

Question 24

MECs

Answer 24

MEC’s subject to 10% penalty if withdrawals before age 59½.

A policy is a MEC if it fails the 7 Pay Test.

A contract fails the 7 Pay Test if the cumulative premiums paid exceed the premiums due for the time period being considered.

If the contract is deemed a MEC the withdrawals are taxed on a LIFO basis.

If the contract is not a MEC the withdrawals are taxed on a FIFO basis.

MEC status only affects withdrawals and the ability to take loans, not the taxation of proceeds at death.

If the client does not intend to take a withdrawal or loan, then creating a MEC is of no consequenc

Question 25

Transfer of Life Insurance Policy for Value

Rule Regarding Taxation

Exceptions

Answer 25

Taxable to transferee to the extent proceeds exceed basis.

Exceptions to Transfer for Value Rule:

Transferred to the insured.

Transferred to a business partner of the insured.

Transferred to a partnership of the insured.

Transferred to a corporation in which insured is a shareholder or officer.

Transfer that results in carryover basis from transferor to transferee.

Question 26

Taxation of Life Insurance Premiums

Answer 26

Premiums paid by the insured are not tax deductible by the insured.

Group life insurance premiums paid by an employer are deductible by the employer.

Premiums paid by the employer are taxable income to the employee, to the extent that they exceed $50,000 of coverage.

An employee must impute taxable income for benefits in excess of $50,000.

The imputed income is a function of age and amount of benefits per $1,000 in excess coverage.

If the employer provides permanent life insurance coverage and pays the entire premium, the employee is taxed on the non-term portion of the premium; this portion of the premium is deductible by the employer

Question 27

Definition of “Chronically Ill”

Answer 27

A chronically ill individual is a person who is not terminally ill but has been certified by a licensed health care provider as being unable to perform, without assistance, at least two activities of daily living for at least 90 days, or a person with a similar level of disability.

Activities of daily living include:

eating,

toileting,

transferring,

bathing,

dressing, and

continence.

Question 28

Taxation of Annuities

Answer 28

For annuities after 1982 and premature withdrawals, the withdrawal receives LIFO tax treatment.

Any annuity prior to 1982 premature withdrawals receive FIFO tax treatment.

Question 29

Non-cancelable Policies

Answer 29

These policies are continuous and guarantee an insured the right to renew until a specific age or stated number of years.

The insurer cannot raise premiums and cannot cancel the policy.

Question 30

Guaranteed Renewable Policies

Answer 30

The right to renew is guaranteed until a specific age or stated number of years.

The insurance company cannot cancel the policy but they can raise the premiums, as long as the premiums are raised for an entire group or class of policyholders.

Question 31

Medicare Part A

Answer 31

Part A is paid for by a portion of the Social Security tax.

Services covered include: hospital, skilled nursing, home health care, and hospice.

A benefit period begins on the first day a patient receives services and ends after 60 consecutive days of no further hospital stays, skilled nursing care or rehabilitation services. There is no limit to number of benefit periods per individual.

Deductible of $1,556 (2022) / benefit period.

Coinsurance (insured pays).

$389 (2022) / day for days 61 – 90 / benefit period

$778 (2022) / day for days 91 – 150 (lifetime reserve days)

Skilled nursing facility coinsurance.

$194.50 (2022) / day for days 21 – 100 / benefit period

Medical equipment coinsurance of 20%.

Services not covered are custodial care services. Custodial care services include a nursing care facility that provides assistance with activities of daily living, such as eating, bathing and dressing.

Question 32

Medicare Part B

Answer 32

Persons with Part A coverage can elect Part B coverage as well.

Premiums are paid by the insured ($170.10 (2022) / month or more depending on income).

Services include:

Doctor’s services

Ambulance transportation

Diagnostic tests

Outpatient therapy

Home health care

Clinical research

Durable medical equipment (wheel chairs, hospital beds, walkers, oxygen)

Mental health (inpatient, outpatient, partial hospitalization)

The deductible is $233 (2022) / year with a coinsurance of 20%.

Part B does not cover: dental care, cosmetic surgery, hearing aids, and eye exams.

Note: There’s a high probability of a question coming from what is not covered.

The basic Part B monthly premium is $170.10 (2022) but may be higher for individuals with annual incomes greater than $91,000

Question 33

What is NOT covered by Medicare Part B?

Answer 33

Covered

Welcome to Medicare preventive visit within first 12 months you have Part B.

Yearly wellness visits covered once every 12 months if you’ve had Part B for more than 12 months.

Not Covered

Dental care, dentures.

Cosmetic surgery.

Hearing aids.

Eye exams.

Question 34

Consolidated Omnibus Budget Reconciliation Act (COBRA)

Answer 34

COBRA is an extension of group health insurance with the same coverage.

An employer may charge 2% for administrative expenses. (Total expense to the employee is 102% of actual insurance cost.)

Applies to loss of coverage for the covered employee, employee’s spouse and/or dependent child.

18 months for reduction in hours or normal termination.

36 months for death.

36 months for divorce.

36 months for Medicare eligibility.

36 months for loss of dependency status by children of employee.

Up to 29 months if employee meets Social Security definition of disabled.

Question 35

Definitions of Disability

Answer 35

Any Occupation

Considered disabled if insured cannot perform the duties of “Any Occupation.”

This definition provides for the least expensive premium.

Modified Any Occupation

Considered disabled if unable to perform duties of gainful occupation they’re reasonably fitted by education, experience, training, and prior economic status.

Own Occupation

Considered disabled if insured cannot perform the duties of his “Own Occupation.”

More expensive, ideal for specialized, high paying fields.

Split Definition

Begins with own occupation, and moves into modified any occupation after a year or two under the own occupation definition.

Question 36

Taxation of Disability Insurance Benefits

Answer 36

If EMPLOYEE pays the premium:

Premiums are Not Deductible;

Benefits ARE Tax-Free.

If EMPLOYER pays the premium:

Premiums ARE Deductible to Employer

Benefits to Employee IS TAXED

If EMPLOYEE pays premium with PRE-TAX dollars (cafeteria plan):

Benefits to employee are TAXED.

Question 37

Homeowners (HO) Insurance Section I Coverages

Answer 37

Coverage A: Dwelling.

Coverage B: Other structures.

Coverage C: Personal property.

Coverage D: Loss of use.

Question 38

Homeowners (HO) Insurance Section II Coverages

Answer 38

Coverage E: Personal Liability.

Coverage F: Medical Payments to Others.

Question 39

Basic Named Perils

Answer 39

Fire

Vehicles

Lightning

Smoke

Windstorm

Vandalism

Hail

Explosion

Riot

Theft

Aircraft

Volcano

Note: Sometimes just reorganizing the letters in a friendlier format can make memorization easier: VVV WEATHR FS.

Question 40

Broad Named Perils

Answer 40

Basic Named Perils 1-12, plus:

Falling objects

Weight of ice, snow, sleet

Accidental overflow of water

Sudden bursting of appliances

Freezing of system or appliance

Damage from electrical current

Note: Sometimes just reorganizing the letters in a more friendly format can make memorization easier: SWADe FF. (The De represents damage from electrical current).

Question 41

General Exclusions for Homeowner’s Policies

Answer 41

Movement of ground.

Includes an earthquake or landslide.

Ordinance or law.

Loss resulting from regulations regarding construction or demolition.

Damage from water.

Floods, water from underground and sewer backup.

War or nuclear hazard.

Including a nuclear power plant.

Power failure.

Such as a power plant failure that causes a loss

Intentional act.

Burning down your own house.

Neglect.

Must take reasonable means to save property and mitigate loss.

Question 42

Coverage A: Dwelling

Answer 42

Covers repair or replacement of the house, attached structures and building materials on premises.

The insured must purchase an amount equal to replacement cost (cost to rebuild) of the building.

Insured must carry at least 80% of replacement cost of the building (coinsurance).

Coinsurance

Actual Cash Value.

• Represents the depreciated value of the property.

Replacement Cost.

• Amount necessary to purchase, repair or replace with similar quality at current prices.

Insured must carry 80% of the replacement cost at the time of the loss.

• Formula: (Insurance Purchased ÷ Coinsurance) x Loss or Replacement Cost.

Question 43

Coverage B: Other Structures

Answer 43

• Includes detached garages, storage buildings, etc.
• Limit is usually 10% of the amount of Coverage A.
• Other structures will not be covered if used for business purposes.

Question 44

Coverage C: Personal Property

Answer 44

Includes furniture, electronics, clothing, paintings, etc.

Limit is usually 50% of Coverage A amount.

Coverage is still effective, regardless of where property is located at the time of loss.

Standard coverage is for actual cash value, need an endorsement for replacement cost.

Limits are placed on personal property losses, e.g., cash, coin collections ($250), jewelry ($1,500).

Exclusions include: property of roomers/renters or property in an apartment rented to others.

Question 45

Coverage D: Loss of Use

Answer 45

Combination of additional living expenses and loss of rental income.

Limit is usually 20-30%* of Coverage A amount for insurance forms HO-2, HO-3, HO-4, and HO-5.

50% of Coverage C for HO-6, and 10% of Coverage A for HO-8.

Loss resulting from living in a hotel because residence is damaged or being repaired.

Alternatively, if rental income is lost due to a property being damaged, the insured may collect.

* Insurance is state run and there may be differences between states.

Question 46

Coverage E: Personal Liability

Answer 46

Protects the insured against claims arising out of both bodily injury and property damage.

The insurer will cover both the damages and the costs of any defense of the claim or suit.

The minimum amount of coverage is $100,000 per occurrence.

The Coverage E liability insurance is based on a legal liability to pay.

The insurer will only pay to the lesser of the damage or the coverage.

Question 47

Coverage F: Medical Payments to Others

Answer 47

Includes coverage for the medical payments to others for injuries that arise even where the insured is not liable for the injury.

Medical expenses include reasonable charges for medical procedures, surgical procedures, hospital stays, ambulances, dental care, X-rays, professional nursing, prosthetic devices, and funeral services.

Coverage F does not apply to the insured or members of the insured’s household.

This coverage is not liability coverage and is not based on fault.

Question 48

What conditions must be met for an individual to collect under Coverage F: Medical Payments to Others?

Answer 48

One of the following conditions must be met for an individual to receive medical payments coverage from the insured:

The injury occurs while the person has permission to be at the insured location.

The injury occurs while the person is away from the insured location and is caused by a condition at the insured location or on property immediately adjoining the insured location.

The insured injures another person while away from the insured location.

An animal owned by or in the care of the insured injures an individual off the insured premises.

Question 49

What conditions must be met for an individual to collect under Coverage F: Medical Payments to Others?

Answer 49

One of the following conditions must be met for an individual to receive medical payments coverage from the insured:

The injury occurs while the person has permission to be at the insured location.

The injury occurs while the person is away from the insured location and is caused by a condition at the insured location or on property immediately adjoining the insured location.

The insured injures another person while away from the insured location.

An animal owned by or in the care of the insured injures an individual off the insured premises.

Question 50

HO-4 Contents Broad Form (designed for renters)

Answer 50

Designed for tenants, and provides protection for furniture, clothes, and other personal property against the same perils as HO2 Broad Form.

Loss of use coverage is limited to 20% of the amount of Coverage C (personal property).

Tenant’s improvements and betterments coverage protects the insured for the value for any additions, installations, or improvements made by the insured to the rented dwelling.

Question 51

HO-6 Unit Owners Form (condo owners)

Answer 51

Covers basic and broad named perils, but not building coverage.

The insurance responsibility in a condo arrangement is divided between the condo unit owner and the condo association.

Loss assessments typically need an endorsement.

Provides coverage for the personal property of the condo owner for the same named perils as HO2.

Provides for loss of use coverage equal to a max of 50% of the amount of Coverage C (personal property).

Provides coverage for building alterations and additions, which include appliances, fixtures, real property that pertains exclusively to the insured’s premises, property that is the insured’s responsibility under the condo association agreement and structures owned by the insured other than the condo unit.

Endorsements can be added to HO6 to provide open peril coverage on the unit owner’s building items, personal property, loss of unit rental and assessment coverage.

Question 52

Parts of a Personal Auto Policy

Answer 52

Part A: Liability Coverage.

Part B: Medical Payments.

Part C: Uninsured Motorists.

Part D: Coverage for Damage to Your Auto.

Part E: Duties After an Accident or Loss.

Part F: General Provisions.

Question 53

Part A: Liability Coverage

Answer 53

Covered persons include you, any family member, any person using your car with your permission, any organization responsible for the conduct of someone driving your covered auto, any organization responsible for your conduct while driving a non-owned auto.

Coverage amounts are limited as follows:

Bodily Damage Per Person.

Bodily Damage Per Occurrence.

Property Damage Per Occurrence.

Split Limits: 50/100/25.

Stated in thousands of dollars.

State law minimum limits (on bodily damage and property coverage) automatically increase when driving from state to state.

Insurance on the auto is primary insurance to recover any loss. Driver’s insurance is secondary.

Question 54

Part B: Medical Payments

Answer 54

Covered persons include you or any family member while occupying the auto, you or any family member as a pedestrian struck by an auto, any other person while occupying your covered auto.

Coverage amounts are limited as follows:

Per Person, Per Occurrence Basis.

For example: $5,000 limit per person, four persons in a car, then $20,000 limit.

Exclusions:

Public livery, racing and an auto used without permission.

Question 55

Part C: Uninsured Motorists

Answer 55

Pays what an “under-insured” or uninsured driver should have paid.

Under-insured or uninsured must have been at fault.

Covered persons include you or any family member while occupying the auto, any other person while occupying your covered auto, any person who might have been entitled to damages, you or your family member as a pedestrian.

Exclusions:

Public livery, regular use of a non-owned vehicle, auto used without permission, and auto used in insured’s business.

Question 56

Part D: Coverage for Damage to Your Auto

Answer 56

Provides direct damage coverage on your covered auto and any non-owned auto (rental or borrowed car).

Collision:

Protects against an accident involving another car, running off the road, into a lake, tree or wall.

Comprehensive or Other Than Collision:

Covers the following perils: falling objects, fire, theft, explosion, earthquake, windstorm, hail, water, flood, mischief, vandalism, riot, contact with a bird or animal and breakage of glass.

Insurance company has the option of paying for repairs or actual cash value of auto.

Exclusions:

Public livery, radar detectors, most electronic equipment, nuclear damages, auto used without permission, and auto used in insured’s business.

Question 57

Part E: Duties After an Accident or Loss

Answer 57

Notify the insurer.

File proof of the loss.

Cooperate with the insurer during the investigation.

The insured must file a police report if there is a theft or accident with an uninsured motorist.

Question 58

Part F: General Provisions

Answer 58

Only provides coverage in the United States, Puerto Rico, and Canada.

A personal auto policy is not effective in Mexico.

An insured must notify their insurer about a new car purchase within 30* days of buying the new car.

* State law may differ, 30 days is the maximum time. Most states are 10-15 days.

Question 59

Defense to Negligence

Answer 59

Assumption of Risk.

A person cannot sue a ski resort if injured while skiing because the skier assumed the risk associated with skiing.

Negligence on the part of the injured party.

The negligent act of the injured party caused the injury.

Contributory.

A person’s negligent actions contributed to the loss.

This is a very severe defense and the injured party cannot recover.

Comparative.

A person’s negligent actions contributed to the loss but they can recover a portion of the loss from the other negligent party.

Last Clear Chance Rule.

The plaintiff can collect even if there was contributory negligence on the plaintiff’s part if the plaintiff can prove the defendant had a last clear chance to avoid the accident.

Question 60

Res Ipsa Loquitur

Answer 60

The act speaks for itself.

If an accident occurred, then there was negligence.

For example, if there is an airplane crash, the act speaks for itself and negligence occurred. Airplanes just don’t fall out of the sky.

Question 61

Vicarious Liability

Answer 61

A person is responsible for the acts of others.

For example: A bartender serving alcohol to a customer who later causes an accident or a parent is responsible for acts of their children.

Question 62

Personal Liability Umbrella Policy (PLUP)

Answer 62

A PLUP provides protection against legal obligations that arise from negligent acts.

A PLUP pays the costs, up to the face of the policy, that result in liability.

A PLUP usually provides defense for the insured in the event of a law suit.

A PLUP requires higher liability limits on underlying auto and homeowner policies.

The PLUP does not pay until the liability limits on the underlying policies are exhausted.

The coverage is for liability of the insured, the family members, or both.

The coverage includes exposure at the premises of the residence or away from the residence.

Provides coverage for the insured’s legal obligation because of bodily injury or property damage.

For the exam, look for coverage of $1,000,000 minimum, otherwise it should be considered a deficiency in the financial plan.

Question 63

Personal Liability Umbrella Policy (PLUP) Exclusions

Answer 63

Exclusions:

Coverage for bodily injury or property damage if the act that created the injury or damage was intentional.

Liability that is a result of a business owned or conducted by the insured.

Liability that arises from rental operation conducted by the insured.

Liability that occurs on an uninsured location that is owned by the insured.

Question 64

Differences between Errors & Omissions and Malpractice Insurance

Answer 64

Errors & Omissions:

Covers negligent acts, errors, and omissions.

Many professionals carry E&O Policy, such as:

Accountants

Lawyers

Engineers

Financial Planners

Malpractice Insurance:Provides coverage where bodily injury may occur, such as:

Doctors

Question 65

Who is eligible for survivorship benefits under social security?

Answer 65

Children under 18 are always covered as are caretakers of children under 16.

Spouse age 60 or older if worker is fully insured.

Dependent parents age 62 or older if worker is fully insured.

Question 66

Social Security

Disability Benefits

Answer 66

Long-term benefit if the worker is unable to do any work for which they are suited.

• Five month waiting period (benefits start in 6th month)
• Disability payments stop at retirement age when the worker starts receiving retirement benefits.
• Not eligible if the worker earns $1,350 (2022) or more per month.
• Maximum benefit up to 80% of the worker’s average earnings.
• Benefits also available to children under age 18 or disabled.

Question 67

Social Security

Credits Required for Disabilty

Answer 67

6 credits in 3 previous years if disabled before age 24

2 credits per year between age 21 and year of disability if disabled between ages 24 and 30

20 to 40 credits depending on age if disabled after age 30

• 20 of these credits must be earned inthe 10 years prior to disability.

Question 68

Annual Renewable Term:

Description

Need

Death Benefit

Premium

Cash Value (CV)

Advantages to Owner

Disadvantages to Owner

Answer 68

Description

Pure life insurance, no cash value; initially, the highest death benefit for the lowest premium outlay.

Need

Short to intermediate term need; largest death benefit for minimum initial premium.

Death Benefit

Fixed, level.

Premium

Increasing, exponentially over time.

Cash Value (CV)

None.

Advantages to Owner

Low premium for maximum coverage.

Disadvantages to Owner

Increasing premium; most term insurance lapses.

Question 69

Whole Life

Description

Need

Death Benefit

Premium

Cash Value (CV)

Advantages to Owner

Disadvantages to Owner

Answer 69

Description

Guaranteed premium, death benefit, cash value; dividends may be paid in cash, reduce the premium, accumulate at interest, purchase paid-up additions, or purchase one-year term.

Need

Lifetime coverage. Low-risk tolerance.

Death Benefit

Fixed, level.

Premium

Fixed, level. Straight whole life—payments go to age 100 or 120. Limited pay whole life payments may end at 65.

Cash Value (CV)

Guaranteed, based on guaranteed interest rate.

Advantages to Owner

Predictable; forced
savings and conservative investment. Insurer bears all investment risk.

Disadvantages to Owner

Higher premiums.

Question 70

Variable Life

Description

Need

Death Benefit

Premium

Cash Value (CV)

Advantages to Owner

Disadvantages to Owner

Answer 70

Description

Whole life contract; choice of subaccounts; death benefit depends on investment results, but guaranteed minimum (GMDB).

Need

Lifetime coverage. Desire for investment performance. Assets held in subaccounts.

Death Benefit

Guaranteed minimum: can increase based
on investment performance, but cannot decrease below face value.

Premium

Fixed, level.

Cash Value (CV)

Based on investment performance; not guaranteed.

Advantages to Owner

Combines life insurance and investments on excess premiums.

Disadvantages to Owner

Owner bears all investment risk. (higher risk tolerance)

Question 71

Universal Life A &B

Description

Need

Death Benefit

Premium

Cash Value (CV)

Advantages to Owner

Disadvantages to Owner

Answer 71

Description

Flexible premium, current assumption, adjustable death benefit policy; policy elements unbundled; two death benefit options (A & B).

Need

Flexibility in premiums and benefits:
can be adjusted up (subject to insurability) or down. Assets part of insurance company’s general account.

Death Benefit

Adjustable; Option A like Ord. Life; Option B like Ord. Life plus term rider equal to cash value.

Premium

Flexible.
Policy not recommended for fixed- income clients.

Cash Value (CV)

Varies depending on face amount and premium; minimum guaranteed interest; excess increases cash value.

Advantages to Owner

Flexibility.

Disadvantages to Owner

Some investment risk to owner. (lower risk tolerance)

Question 72

Variable Universal Life

Description

Need

Death Benefit

Premium

Cash Value (CV)

Advantages to Owner

Disadvantages to Owner

Answer 72

Description

Combines features of both universal and variable life.

Need

Need for performance and flexibility.
Assets are held in subaccounts.

Death Benefit’

Adjustable; not guaranteed.

Premium

Flexible.

Cash Value (CV)

Varies depending on face amount, premium, and investment performance; not guaranteed.

Advantages to Owner

Flexibility and investment- based returns.

Disadvantages to Owner

Owner bears all investment risk. (higher risk tolerance)