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DANKO CFP FC REVIEW > Insurance Planning > Flashcards

Insurance Planning Flashcards

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1
Q

Risk

A

Possibility of loss

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2
Q

Peril

A

Cause of possible loss. This is what’s insured against.

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3
Q

Hazard

A

Creates or increases the chance of loss.

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4
Q

Elements of insurance

A
  1. Large number of homogeneous exposure units
  2. Loss must be definite and measurable
  3. Must be fortuitous or accidental
  4. Must not be catastrophic to insurance company
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5
Q

Methods to avoid/reduce risk

A

Avoidance, Diversification, Transference (insurance), Retention (deductible/co-insurance), Reduce.

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6
Q

Insurable interests

A

Property/Casualty: At inception AND at time of claim.

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

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7
Q

Parts of the insurance contract:
Declaration page

A

Factual statements that identify the specific person/property/activity being insured.

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8
Q

Parts of the insurance contract:
Definitions

A

Explains key policy terms.

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9
Q

Parts of the insurance contract:
Insuring Agreement

A

Explains basic promise of the insurance company.

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10
Q

Parts of the insurance contract:
Conditions

A

Explains duties and rights of both parties.

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11
Q

Parts of the insurance contract:
Exclusions

A

Circumstances where the insurer will not pay.

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12
Q

Negligences (5)

A
  • Attractive nuisances (swimming pools/vacant lot).
  • Negligence per se (violate a statute. School crosswalk)
  • Strict liability (product liability)
  • Absolute liability (Workers comp or owning a wild animal)
  • Vicarious liability (respondent superior. Principals/Agents)
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13
Q

Defenses

A
  • Assumption of risk
  • Contributory (jay walking/being drunk)
  • Comparative (A is 20%, Bis 80%)
  • Last clear chance (road rage)
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14
Q

Calculating Life Insurance Needs

A

Capital utilization: Uses annuitization to provide needed income BUT LEAVES NO MONEY at the end of planned period.

Capital needs approach (Capital Retention/Interest Only): Uses interest only.

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15
Q

Insurance Rating Service/Category

A

AM Best A++-F. Two letters “AM” = Two ++ in rating.

Standard & Poor AAA-CCC

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16
Q

Sections of Homeowner’s Policy

A

Section I
A- Abode. Dwelling and Attached structures.
B- Buildings. Structures SEPARATED from dwelling.
C- Contents. Contents and personal property.
D- ‘Dittional/Demnity. Loss of use. This is additional living expenses arising from damage to the insured property.

Section II
E- Enemies. Liability
F- First Aid. Medical payments

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17
Q

Homeowners Forms of Coverage:
HO-1

A

Basic coverage for all sections.

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18
Q

Homeowners Forms of Coverage:
HO-2

A

Broad coverage for all sections.

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19
Q

Homeowners Forms of Coverage:
HO-3

A

Open coverage for A, B, D.
Broad coverage for C.

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20
Q

Homeowners Forms of Coverage:
HO-4

A

Renters insurance.

Broad coverage for C & D only.

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21
Q

Homeowners Forms of Coverage:
HO-5

A

Open coverage for all sections.

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22
Q

Homeowners Forms of Coverage:
HO-6

A

Condo Owners.

Open coverage for C.
Broad coverage for D.

Can have some coverage for A and B.

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23
Q

Homeowners Forms of Coverage:
HO-7

A

Mobile home coverage.

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24
Q

Excluded Property Under Personal Property Coverage

A
  • Animals, birds, or fish
  • Motorized land vehicles and aircraft
  • Property of roomers, boarders, and other tenants
  • Property contained in an apartment regularly rented or held for rental to others by the insured (unless specifically endorsed).
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25
Q

Basic Perils Covered

A

Windstorm
Hail
Aircraft
Riot
Vehicles
Vandalism
Explosion
Smoke

Fire
Lightning
Theft

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26
Q

Broad Perils Covered

A

Basic Perils Plus:

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

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27
Q

Homeowners Policy Exclusions

A

Ordinance/Law
Power Failure
Earthquake
Neglect
Nuclear Hazard

War
Intentional loss
Flood

Sink hole is a COVERED peril for the exam

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28
Q

Replacement Cost Coverage

A

Replacement cost x Coinsurance % = Insurance Required

((Insurance Carried / Insurance Required) x loss)) - Deductible = Amount paid by insurance

Replacement cost of the residence DOES NOT INCLUDE THE LAND!

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29
Q

Requirements for a vehicle to be eligible for: Insurance Service Office (ISO) & Personal Auto Policy (PAP)

A
  • Owned by an Individual or Couple LIVING IN THE SAME HOUSEHOLD
  • Must be a private passenger auto
  • Can’t be used as a public/livery conveyance (the transporting of people and/or goods for hire, such as by a taxi service, motor carrier, or a delivery service.)
  • Can’t be rented to others.
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30
Q

Auto Insurance Policy Parts

A
  • Part A: Limited to third parties
  • Part B: Medical Payments
  • Part C: Uninsured/Underinsured Motorist
  • Part D: Damage to the covered auto
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31
Q

What is classified as a “covered auto” under a Auto Insurance policy?

A
  • Any vehicle shown on the Dec page.
  • A private passenger auto, pickup truck, panel truck or van, ACQUIRED during the policy period. Must notify insurance company within 14 days for D coverage.
  • Any trailer you own listed on the dec page.
  • Any auto or trailer you do not own, while used as a temporary sub for any vehicle that is out of normal use. ie. Repair.

No coverage for business use. Need a business policy for that.

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32
Q

Who are the persons insured under “Part B- medical payments” coverage of the PAP?

A
  • The named insured and any family member who suffers bodily injury caused by accident while occupying a 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 a passenger of the insured auto.
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33
Q

What is Uninsured Motorist Coverage (UM)?

And what kind of insurance is it?

A

This agreement promises to pay the amount an injured insured could have collected from the uninsured driver, if such driver had carried auto liability insurance. This also covers family, other passengers, etc.

UM is Liability Insurance, NOT Medical Payments.

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34
Q

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

A

This is Open perils coverage!!!

Loss Caused by:
- Glass breakage
- Falling Objects
- Fire
- Theft
- Explosion
- Earthquake
- Windstorm
- Hail
- Water
- Flood
- Riot or Civil Commotion
- Contact with Birds or Animals.

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35
Q

What are the benefits of an Umbrella Liability Insurance Policy?

A
  • Nearly always a correct answer.
  • Provides liability coverage (BI/PD) for catastrophic claims.
  • Requires policy owner to carry certain underlying coverage of specified amounts.
  • Professional acts are specifically EXCLUDED.
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36
Q

Professional Liability Insurance

A

Malpractice: Bodily injury (doctors, dentists)

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

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37
Q

What does Worker’s Compensation cover? 4

A
  • Unlimited Medical Expenses
  • Disability Income (TAX FREE). Opposite of UE income.
  • Death benefits
  • Medical and Vocational Rehabilitation

Absolute Liability

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38
Q

Medicare does NOT cover: 2

A
  • Routine foot care, glasses, hearing aids, and dental.
  • Emergency care outside the US (some exceptions for Canada, Mexico and Caribbean)
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39
Q

Explain the limitations of Medicare’s LTC coverage

A
  • 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 with a 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 patients condition must be expected to improve.
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40
Q

HMO vs. PPO

A

HMO:
- Monthly fee regardless of services rendered.
- Out-of-network care not covered (unless an emergency).
- Gatekeeper

PPO:
- Pay Per service. Provider is paid for the actual services rendered.
- Out-of-network partially covered (usually 70%)

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41
Q

COBRA coverage requirements and Qualifying events

A
  • Must have 20 full/part-time employees.
  • The option to buy continuation.

18 months if:
- Voluntary or involuntary termination, or change from FT to PT.
- This covers terminated employees and their dependents.

36 months if:
- Employee death, divorce, legal separation, or eligibility for medicare.
- Loss of dependent status (marriage).
- Reaches dependency age limit specified by plan.
- This covers Spouses, children, dependents.

*If either the employee or a covered family member is disabled (SS definition) within 60 days of a triggering event, the period of continuation coverage can be extended by 11 months (total of 29 months).

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42
Q

What is an HSA?

A
  • Savings accounts
  • Used in conjunction with HDHP.
  • Contributions are deductible for federal tax purposes even if not itemizing. Contributions by an employer are also deductible to the ER, and do not represent taxable income to EE.
  • Distributions are tax-free if used for health care.
  • Contributions not spent are carried forward and portable.
  • Unused assets become property of named bene upon death.
  • Distributions for non-medical are ordinary income plus 20% penalty if under 65.
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43
Q

Definitions of Disability

A
  • Own Occupation: Best definition for the insured. Cant perform duties of Own-Occ.
  • Split Definition: Own-Occ then modified.
  • Any Occupation: SOCIAL SECURITY DEFINITION. Basically have to prove you can’t do ANY gainful activity.
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44
Q

Policy Continuation Provisions for Disability Income

A

Non-cancellable “Noncan”- Guarantee that the individual can keep the policy in force by paying the stated premium and that the premium will not increase. “No can change the premium”

Guaranteed Renewable- Guarantee that the individual can keep the policy in force by paying the stated premium but the insurer may increase the premium by class of insureds. Provides lower premium because policy may increase.

Conditionally renewable allows the above two policies to continue beyond age 65. The policy usually has a 2-year benefit, and the premium is adjusted for benefit and age. Insured must still be an active employee.

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45
Q

Taxation of Premiums and Benefits for Disability Policies

A

Individual OWNS AND PAYS for the contract:
- Premiums are NOT DEDUCTIBLE. Paid with after-tax dollars.
- Benefits are TAX-FREE.
Employee recognizes premium, then benefit is TF

EmployEE owns, EmployER pays the entire premium under a BONUS arrangement (section 162):
- Premiums are DEDUCTIBLE to EmployER.
- Benefits are TAX-FREE to EmployEE.
Employee recognizes bonus, then benefit is TF

EmployEE owns, EmployER pays the entire premium under a SALARY CONTINUATION plan (group plan):
- Premiums are DEDUCTIBLE to EmployER.
- Benefits are TAXABLE to EmployEE.

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46
Q

Lower Risk Permanent Life

A
  • Whole Life
  • Universal Life
  • Insurance company controls the investment return.
  • Assets part of general account.
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47
Q

Higher Risk Permanent Life

A
  • Variable Life
  • Variable Universal Life
  • Client controls the investment return.
  • Assets part of separate account.
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48
Q

Life Insurance Dividend Options

A

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

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49
Q

Life Insurance Nonforfeiture Options

A

CPR!!! Gotta give CPR to not forfeit.

Cash
Paid-up Term insurance (Extended Term)
Reduced Paid-up whole life.

Other surrender options would be to use the APL to cover the premium (if elected by the policyholder in the application), and another option would be to annuitize the cash value.

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50
Q

Life Insurance Settlement Options

A

Cash
Pure Life/Single Life
Refund
Period Certain
Specified Income/Period
Interest Only
Joint and Survivor

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51
Q

MEC:
- year
- distributions/withdrawals
- early withdrawal penalty?
- DB and dividends?

A
  • Entered into after June 21, 1988
  • Fails to meet the 7-Pay Test (Single premium)
  • Distributions/Withdrawals are taxed LIFO
  • Distributions under 59.5 are also subject to a 10% federal penalty tax (if not disabled).
  • Death Benefit is still tax-free.
  • dividends paid by mutual insurance companies are taxed as income if they are received as cash/reduce premiums due, or retained by the insurer in repayment of a policy loan.
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52
Q

What are the MEC Grandfather Life Insurance Rules?

A
  • If the DB INCREASES by $150,000 OR LESS and the insured has guaranteed insurability, the policy will NOT lose its grandfathered status.
  • If the DB increases more than $150,000, the contract becomes subject to material change rules and may lose its grandfathered status.
  • If the policy increases by ANY amount, and the insured has to show proof of insurability, the policy MAY lose its grandfathered status.
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53
Q

When are the proceeds in a Life Insurance policy taxable due to Transfer for Value?

A

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 transfer to the insured (most common).
  • A transfer to a partnership in which the insured is a partner.
  • A transfer to a corporation in which the insured is a shareholder or officer.
  • A transfer pursuant to a Divorce.
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54
Q

1035 Tax Free Exchange Rules

A

Life to Life
Annuity to Annuity
Life to Annuity

NO Annuity to Life

Lindsay Lohan went to AA in LA, NOT AL.

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55
Q

Buy Sell Stock Redemption vs. Cross-Purchase

A

Stock Redemption:
- No step up in basis

Cross-Purchase:
- Step up in basis

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56
Q

Split Dollar Insurance: Endorsement method vs Collateral Assignment method

A

Endorsement Method:
- Employer is owner
- Employee is not a shareholder

Collateral Assignment Method:
- Employee is owner
- Employee is a shareholder
- Employee assigns the policy to the employer at the earlier of the employee’s death, or the termination of the split-dollar plan.

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57
Q

Annuity Taxation

A

Periodic Payouts:
- Monthly payment x Life expectancy in MONTHS = Expected Payout.
- Investment (basis) / Expected Pa1st out = EXCLUSION RATIO.
- Once basis is recovered, the whole distribution is taxable.

Withdrawals:
- LIFO, Ordinary income.
-Ordinary income tax plus 10% penalty if under 59.5.

Ordinary Income!! NOT LTCG!

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58
Q

FSA

A
  • Must be used by March 15th or forfeited to the company (use it or LOSE it - Medical Only)
  • Dependent Care must be used by 12/31
  • Not subject to income tax, FICA or FUTA
  • Health FSA may not be used to reimburse 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.
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59
Q

Major Tax Free Fringe Benefits

A
  • Health Care Premiums.
  • Insurance Premiums on non-discriminatory group life policy up to $50k.
  • Company car for work only.
  • Employer-provided transit passes ($300/mo. cap) or parking ($300/mo. cap).
  • Occasional overtime meal money, cab fare, theater or sporting event tickets.
  • Discounts on services limited to 20% of selling price charged to customers.
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60
Q

When are Fringe Benefits Taxable?

A
  • Health insurance premiums paid for self-employed, partners, and more than 2% owners of an S-Corp are TAXABLE.
  • 100% is deductible as an adjustment to income on the FRONT of the 1040.
  • This can include all types of health insurance programs, BUT NOT DISABILITY INSURANCE PREMIUMS
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61
Q

Aleatory Contract

A

With insurance, the amounts paid by the contract holder and issuer are unequal.

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62
Q

Collateral Source Rule

A

If Penny
was injured by Ricky, and penny has her own insurance to compensate for the injury, she can still sue Ricky for the amount of medical expenses and lost income she would have incurred had there been no personally owned insurance.

The measure of damage should not be mitigated by payments received from sources other than the negligent party.

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63
Q

Subrogation

A

When an insurer pays a claim, it takes over the legal rights it’s insured had against a negligent third-party.

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64
Q

Capital Retention Method:

A

(Amount needed / Investment return %) + money for year 1.

65
Q

Long-term care insurance

A
  • LTC insurance is purchased to cover a certain dollar amount per day.
  • Services covered: skilled, intermediate, custodial, home health care, and adult day care. The home health care benefit can be as much as 100% of the nursing home benefit.
  • Has elimination period and benefit period.
66
Q

Participating Policies

A

Willful overcharge. If the additional premium is not needed, it is returned as a dividend tax-free.

67
Q

Is personal property under a homeowners policy covered anywhere in the world?

A

Yes.

68
Q

Replacement Cost vs. Actual Cash Value

A

RC: No deduction in benefits is made for depreciation. Dwelling will typically be covered under replacement cost coverage.

ACV: RC - Depreciation. Could result in a shortage to replace an item. Personal property (contents) will typically be covered by ACV.

69
Q

Property cost calculation:

A

For loss coverage under a typical homeowners policy, when the amount of the insurance is LESS THAN 80% of the dwelling’s replacement cost, the insurer will pay the GREATER of :

  • ACV, or
  • Replacement cost formula:
    Replacement cost x co-insurance % (80%) = Insurance required.
    ((Carried / Required) x Loss) - deductible = Amount paid by insurance.

When the amount of dwelling insurance is 80% of the replacement cost, OR GREATER, just apply the formula

70
Q

Covered Drivers:

A
  • Named insured
  • Family member living in same house
  • Person using auto with permission
  • Spouse living in the same house.

If the spouse ceases to be a resident of the same household, he or she is still covered until the EARLIEST of 90 days following change of residency, effective date of spouses new policy, or end of the policy period.

71
Q

PAP Split limits

A

First number is limit paid to any one person for bodily injury.

Second number is aggregate that will be paid for all bodily injury.

Third number is aggregate property damage claims.

72
Q

Workers Comp vs Unemployment

A

Workers comp benefits are tax-free to the employee (but still deductible to the employer).

Unemployment is based off of previous earnings, payable for 26 weeks + 13 in high periods, and are included in income. FULLY TAXABLE.

73
Q

Medicare Part A Eligibility:

A

All persons 65 and over who are entitled to monthly SS cash benefits or monthly benefits under Railroad Retirement programs are entitled to benefits.

A SS disability beneficiary is covered under Medicare after entitlement to disability benefits for 24 months or more. Those covered include disabled workers at any age, disabled widows and widowers age 50 or older, beneficiaries age 18 or older who receive benefits because of a disability beginning BEFORE age 22, and disabled qualified railroad annuitants.

The above disabled persons receive Part A and Part B.

74
Q

Medicare Part A Benefits

A

A. Hospital stays, subject to deductibles. Limited to 150 days for one stay.
B. Post-hospital extended care in a skilled nursing home. Up to 100 days.
C. Unlimited number of post-hospital home health services.
D. Hospice care for terminally ill patients.
E. Patient pays for first 3 pints of blood or donates them. Medicare A covers additional blood.

75
Q

Medicare Part B

A
  • Part B is voluntary
  • Same persons eligible for A are eligible for B
  • Financed through monthly premiums
  • Patient pays a deductible first
  • Medicare pays 80% of unlimited amount of approved charges (co-insurance).
76
Q

Medicare Part B Benefits

A

A. Doctor’s services
B. Diagnostic tests, radiology/pathology, treatment for mental illness, transfusion of blood, physical/occupational therapy, drugs and biologicals that cannot be self-administered.
C. Outpatient services from a participating hospital
D. Home health services
E. Preventative care services (wellness checks)
F. Depression screening

Excluded:
- Dental
- Eye glasses
- Hearing aids
- Most immunizations (does cover one free flu vax per year)
- Prescription drugs.

77
Q

Medicare Part D

A

Drug coverage. Drug companies must generally provide a 50% discount.

Person must have A and/or B coverage.

78
Q

T or F: Medigap policies are available only to individuals currently enrolled in BOTH A and B.

A

T

79
Q

T or F: Children can remain covered on their parents employers’ policies until age 26

A

T

80
Q

HSA Eligibility

A
  • Must be covered under a HDHP
  • Below Medicare eligibility age - 65
  • Not covered by any other health plan
81
Q

Features of HSAs

A
  • Distributions can be for health care needs not covered by HDHP and are tax-free.
  • 20% penalty for nonmedical HSA withdrawals if under age 65.
  • Can be used to pay for retiree health insurance premiums, prescription drugs, COBRA, and LTC PREMIUMS.
  • Preventative care services are not subject to the deductible.
  • Contributions not used can be carried forward for life, and transferred to spouse tax-free upon death.
  • Unused assets become property of a named beneficiary upon the account-holder’s death, or go to the estate if no bene. A non-spouse bene has to include assets as ordinary income.
  • Employees are allowed a once in a lifetime rollover from their IRA into an HSA.
82
Q

Do HSAs cover almost all expenses necessary? Even ones that are not covered by Medicare?

A

Yes. HSAs cover most all necessary expenses. especially those expenses not covered by insurance (HDHP). HSAs also can be used to pay deductibles!!

83
Q

Health Reimbursement Arrangements

A

HRA is an arrangement that is SOLELY EMPLOYER FUNDED. It reimburses employees for substantiated medical expenses up to max dollar amount per coverage period.

Cannot be part of a cafeteria plan because it is solely employer funded.

Used before FSAs.

Employer retains any excess unused money in an HRA.

R for EmployeR!

84
Q

Group health conversion plan

A

With regard to health insurance, the notification to convert should be made immediately after the termination or, if COBRA is elected within 180 days, before the end of the continuation period.

Employer should inform the terminating employee and/or any dependents that may be losing coverage of any available options. Employee must submit an app and pay initial premium within 31 days of the date the group insurance ends.

85
Q

Disability Policy Riders

A

Residual disability benefit Indemnifies the insured. Makes them whole for any decrease in salary when injured.

Guaranteed insurability option- Permits an insured the right to purchase additional amounts of coverage without new proof of insurability. Increased coverage is subject to financial underwriting. This is different from guaranteed renewable!!

86
Q

Disability Policy Riders

A

Residual disability benefit Indemnifies the insured. Makes them whole for any decrease in salary when injured.

Guaranteed insurability option- Permits an insured the right to purchase additional amounts of coverage without new proof of insurability. Increased coverage is subject to financial underwriting. This is different from guaranteed renewable!!

Social Insurance Substitute- For total disability, the monthly benefit will be equal to the social insurance substitute (SIS) less any social insurance benefit (Social Security disability payments) received in that month. SIS - SSDI. Cannot reduce Base.

87
Q

T or F: There is a 5-month waiting period under SS. However, the disabled person generally must wait for 12 months because SS will not pay if the disability lasts less than 12 months

A

T

88
Q

Qualified LTC policies

A

A policy that provides cash at surrender is a NONqualified policy. If it is a NQ policy, the premiums cannot be deducted.

89
Q

T or F: A health FSA cannot be used to reimburse premiums or expenses for LTC, but an HSA can be used for LTC expenses and to pay premiums for QUALIFIED LTC insurance.

A

T

90
Q

Medicaid

A

For individuals whose income and resources are insufficient to meet the costs of necessary medical care.

A single individual will not qualify for medicaid in most states unless he or she has less than $2,000 in countable assets.

91
Q

Taxation of DB in a Group life policy

A

Premiums are deductible by the employer.

The ability for the employee to name the beneficiary causes DB to be included in the employee’s estate. The DB is not taxable as long as it’s under the 50k exemption.

Individuals are generally ineligible for Medicaid coverage if they give money or assets away within 5 years of incurring nursing home expenses. Individuals also become ineligible if they have more than 700k “ish” in home equity.

92
Q

FSA

A
  • Cafeteria Plan that offers an FSA for qualified medical expenses, and an FSA for dependent care.
  • Before the end of the prior calendar year, employees file a written election with their employer to reduce their salaries by the amounts they choose to allocate to FSA accounts. These reductions avoid income, FICA and FUTA taxes.
  • Employee submits receipts for expenses to be reimbursed.
  • Employer can also contribute to the plan.
  • For the DCFSA, both spouses must work (unless disabled or a student) in order to be eligible to contribute to the plan (if one spouse earns less than $5k, the benefit is limited to whatever the spouse earned), and every tax-free dollar used to reimburse expenses directly reduces the dependent care credit.
93
Q

DCFSA

A

Can pay eligible expenses for care of a participants dependent child under age 13.

94
Q

Expenses not eligible for reimbursement by a DCFSA

A
  • Tuition and Fees
  • Expenses for children age 13 and older
  • Late PAYMENT fees
  • Overnight camps
  • Payments for services not yet provided
  • Field Trips
  • Clothing or Food
  • Transportation to and from the dependent care provider
95
Q

Disadvantages of FSAs

A
  • Any money that is left unspent at the end of the coverage period is forfeited and can be applied to future plan administrative costs, or can be equally allocated as taxable income among all plan participants.
  • The coverage period generally ceases upon termination of employment unless the employee continues coverage under cobra.
96
Q

Voluntary Employees Beneficiary Association:
Can VEBAs offer any benefit that is similar to a Pension or annuity at the time of mandatory or voluntary retirement?

A

NO!

97
Q

Are prepaid legal services and vision insurance taxable benefits to employees?

A

Yes. Deductible by ER, generally taxable to EE.

98
Q

If an employer provides LTC coverage through an FSA, is the coverage included as income to the employee?

A

Yes.

99
Q

Taxation of Whole Life Insurance @ Surrender.

A

Cash value above cost basis at the time of SURRENDER is taxed as ORDINARY INCOME.

100
Q

Dividends paid by mutual insurance companies under MECs are taxable as income if they are used as follows:

A
  • Received in cash or used to reduce premiums due.
  • Retained by the insurer in repayment of a policy loan.
101
Q

Transfers of policies to spouses and children

A

A gift of a policy to a family member causes a taxable gift, but not a transfer for value because no consideration is received. A sale of a policy to a family member, other than the insured, is not a taxable gift but is a transfer for value.

102
Q

T or F: If an exchange involves life insurance policies, the policies must have the same owner and insured, or if an annuity is exchange, the contracts must name the same owner, and the same annuitants. Otherwise, the exchange does not qualify as a tax free exchange.

A

T

103
Q

Stock Redemption (Entity Purchase)

A
  • Corporation buys policies on stockholder’s. Agrees to purchase the stockholders interest upon death.
  • Best for multiple owners.
  • Corporation is Owner and Beneficiary of the policies of each stockholder.
  • Nondeductible, tax-free benefit.
  • Creditors have right to claims.
  • NO STEP-UP in Basis.
104
Q

Cross-Purchase (Stockholder Purchase

A
  • Think, Cross-parter, each partner buys a policy.
  • One stockholder buys a policy on the others. One stockholder agrees to purchase the deceased stockholders interest.
  • Best with fewer owners.
  • Each stockholder is owner and beneficiary of other stockholders policy.
  • Nondeductible, tax-free benefit.
  • Creditors have no right to claims (owned by individual).
  • STEP-UP in Basis.
105
Q

Are the premiums for Key-person insurance deductible?

A

No they are not, but the proceeds of the life policy are received tax-free.

106
Q

BOE insurance- Sole Proprietor

Taxable?

A

Expenses are deductible as a business expense, but the proceeds are taxable.

107
Q

BOE insurance- Corporation

A

Expenses are not deductible, but the proceeds are tax-free.

108
Q

Medigap (Medicare Supplemental policy)

A

Medigap policies include benefits to pay deductibles and coinsurance but also add benefits not included in Medicare.

Medigap policies offering prescription drug coverage are no longer issued.

109
Q

Long-term care insurance:
- Eligibility of benefits
- Services offered
- Elimination period and benefit period
- Provisions

A
  • A chronically ill person has been certified as meeting one of the following requirements: expected to be unable to perform at least two activities of daily living for a period of at least 90 days, or, substantial services are required to protect the individual from threats to health, and safety due to a substantial cognitive impairment.
  • skilled, intermediate, custodial, home healthcare, and adult day care.
  • Elimination and max benefit periods will depend on each policy.
  • Inflation protection, amongst others can be added for additional premium.
110
Q

Taxation of premiums and benefits - 2022

A

Premiums paid and unreimbursed expenses for qualified LTC services are deductible as ITEMIZED medical expenses. The deduction is subject to dollar limitations that increase with age. Deductions are subject to 7.5% of AGI floor.

111
Q

Taxation of Group Disability plans:

A

Employer pays and deducts premium.

Benefits paid to the employee are taxable income.

There are also partially contributory plans.

112
Q

What is a Section 125 Cafeteria pla?

A
  • Plans that allow employees to choose from a “cafeteria” of benefits provided by their employer.
  • Must include a cash option to allow participants to receive cash in lieu of non-cash benefits of equal value.

Examples of cafeteria plan choices include the following:
- Term life equal to 2 times salary
- Medical insurance
- Short/long-term disability insurance

a 401(k) arrangement can be offered under a cafeteria plan.

113
Q

Flexible Spending Account

A
  • FSAs are Cafeteria plans under section 125.
  • Most cafeteria plans offer two FSA accounts; one account for qualified medical expenses, and another for dependent care.
  • Before the end of the prior calendar year, employees file a written election to reduce their salaries by the chosen amounts. The dollar limit must be made before the compensation is earned.
  • Reductions are not subject to income tax, FICA, or FUTA.
  • Each employee keeps receipts of expenses in each benefit category and submits them for reimbursement.
114
Q

Health FSA

A
  • Used to pay for medical expenses not covered by insurance.
  • Employers may offer either a grace period or a rolling balance, but not both.
115
Q

Dependent Care FSA

A
  • Maximum tax-free reimbursement is $5,000 (2022).
  • Any tax-free reimbursement from the account reduces the expense eligible for the dependent care credit.
  • If the participant is married, both spouses must earn income in order for the dependent care FSA to be available. Exceptions is spouse is disabled or a student.
  • If one spouse earns less than $5,000, then the benefit is limited to what the spouse earned.
116
Q

Dependent Care FSA eligible expenses

A

Can pay eligible expenses for care of a participants children under age 13, or any age if dependent is mentally or physically unable to care for self.

117
Q

Ineligible expenses for DCFSA

A
  • Tuition and fees
  • Expenses for children 13 and older
  • Late PAYMENT fees (late pick-up fees are good).
  • Overnight camps
  • Advanced payments for services not provided yet
  • Field trips, clothing and food
  • Transportation to and from the dependent care provider
118
Q

FSA coverage period:

A
  • Ends either at the time the “plan year” ends, or at the time when an employee’s coverage under the plan ends.
119
Q

Advantages of FSAs

A
  • The participating employee’s entire annual contribution is available at the start of the plan year.
  • An employee does not continue to contribute to the plan upon termination of employment.
120
Q

Disadvantages of FSA

A
  • Any money left unspent at the end of the coverage period is forfeited and can be applied to future plan admin costs, or can be equally allocated as taxable income among all plan participants.
  • “Coverage period” generally ceases upon termination or employment whether initiated by the employee or the employer, unless employee elects COBRA.
121
Q

Voluntary employees’ beneficiary association (VEBA)

A
  • Employers establish VEBAs to fund certain benefits for its members.

Benefits can include the following:
- Death benefits
- Medical expense benefits
- Disability benefits
- Legal expense benefits
- Unemployment benefits
- Childcare benefits
- Severance benefits
- Education benefits

Notice there are no benefits that are similar to pensions, annuities, retirement savings or deferred comp. That is because they are not allowed!!

122
Q

Prepaid legal fees

A

Expense of the plan is deductible to the employer, but benefits are generally taxable as compensation to the employee.

Individually purchased plans would be paid for with after-tax dollars, but the benefits are tax-free.

123
Q

The uniform simultaneous death act

A

Any persons who die within 120 hours of each other, by law, predecease each other. This keeps the property of one deceased person from passing through the estate of another deceased person before passing to those who survive them both. 

124
Q

Loss deduction for annuities

A

A loss deduction can be claimed only if the loss is incurred in connection with the taxpayers trade or business, or from a transaction entered into for profit.

125
Q

What happens if an annuity contract is held by an entity who is not a natural person (corporation)?

A

The annuity taxation rules change. The income on the contract must be treated as ordinary income received or accrued by the holder that year.

126
Q

Disability income insurance

A

Disability carriers will typically issue only 50%-60% of earned income.

This may be improved by adding group disability coverage AFTER the individual policy has been issued.

127
Q

Long-term care insurance

A

Generally purchased to cover a certain dollar amount per day. Per diem.

128
Q

What are the only qualifying events that would trigger a 18 month continuation period?

A

Voluntary or involuntary termination

Or

Change from full-time to part-time

Everything else is 36 months.

129
Q

LTC policies must be ______________________

A

Guaranteed renewable.

130
Q

Medicare Limitations to LTC Benefit:

A
  • The patient’s condition requires skilled nursing.
  • The patient has been in a hospital at least 3 days in a row before admission to a participating skilled nursing facility.
  • The patient is admitted to the skilled nursing facility within a short time, generally 30 days, after leaving the hospital.
  • The patient’s care in the skilled nursing facility is for a condition that was treated in the hospital.
  • A medical professional certifies that the patient needs and receives skilled nursing care.
131
Q

Needs analysis vs. Human life value.

A

Needs analysis estimates survivors needs that must be met following an individuals premature death and compares those need to the resources available.

Human life value analysis is based on the insureds individual income earning ability. It factors in a discount rate to determine the present value.

Needs analysis = considers existing insurance and investments.

Human life = replaces income earning ability, and factors no other resources.

132
Q

Withdrawals from Cash Value if life insurance:

A

Can make partial withdrawal of cash value with no requirement to repay the loan.

The DB will be reduced by the outstanding loan amount.

As long as the policy is not a MEC, the withdrawal is not taxed.

133
Q

Keeping a universal policy in force

A

If the premiums paid + Cash value covers the expenses of the policy (company expenses & mortality costs) then no extra premium is needed.

Mortality cost is the cost of pure protection.

134
Q

Taxation of whole life insurance: dividends

A

Dividends paid are generally treated as return of unused premium, and are not income taxable, with the exception of MECs.

135
Q

Taxation of whole life insurance: withdrawals and loans

A

withdrawals and loans against a life insurance policy do not count as taxable income unless the policy is surrendered or lapses, and the amount owed exceeds what was paid in.

136
Q

7-2 and 7-3: taxation of loans from whole life at surrender

A
137
Q

MECs vs non-MECs for taxability

A

Normally dividends are not taxed because they are a return of premium, and policy loans and withdrawals from CV are not taxed.

With a MEC, loans against the contract are treated as distributions. Distributions are taxed under the interest first rule. If dividends paid by mutual life insurance companies are received in cash or to reduce premiums do they are taxable as income. If dividends are retained by the insurer as repayment of a policy loan, It is also taxed.

MEC distributions are taxed LIFO!

138
Q

BOE for Sole Proprietors

A

Deductible as a business expense, benefits are taxable.

139
Q

BOE for Corporations

A

Non-deductible, benefits are tax-free.

140
Q

Medicare Part A:
- What kind of coverage is it??
- Who is eligible? (2)
- What are the FOUR broad categories of benefits?

A

THIS IS THE HOSPITAL INSURANCE COVERAGE PORTION

  • All persons 65+ who are entitled to monthly Social Security or Railroad retirement program cash benefits.
  • All disabled beneficiaries, receiving Social Security for at least two years.
  1. Hospital care
  2. Nursing home or extended care facility
  3. Home health services
  4. Hospice care
141
Q

Medicare Part B:
- What kind of coverage is it??
- How is it financed?
- What are the FOUR coverage categories?
- Is there a deductible and coinsurance?

A

THIS IS THE VOLUNTARY MEDICAL INSURANCE PORTION

  • financed jointly through monthly premiums, paid by persons who have elected coverage, and by the federal government.
  1. Physicians services
  2. Home health services
  3. Diagnostic tests
  4. All outpatient services of a participating hospital
  • the patient pays the deductible. Medicare usually pays 80% of the approved charges after the deductible.

Generally does not cover outpatient prescription drugs, but does cover some oral anticancer drugs, certain drugs for hospice enrollees, and certain drugs that can’t be self administered.

142
Q

Is COBRA based on the number of employees? or the number of employees covered by the plan?

A

Number of total employees. Needs to be at least 20 or more.

In order for someone to elect cobra, they need to be participating in the plan!

143
Q

LTC Insurance:
- Do you typically need a separate policy?
- Premiums and benefits
- Is there any deduction limitations?

A

Yes, you typically need a separate policy.

Premiums paid and unreimbursed expenses for qualified LTC services are deductible (as itemized medical expenses). The deduction is subject to a 7 1/2% AGI floor.

The deduction is subject to dollar amount limitations that are based on age. This is important to remember.

144
Q

Waiver of premium: whole life vs UL/VUL

A

Whole life premium is completely waived

UL/VUL disability income benefit pays either the charges for mortality and administrative expenses, or full amount of premium.

145
Q

What is a Life Settlement and how is it taxed?

A

It is a transaction involving an insured who is not terminally, ill or chronically ill, and is generally over age 65.

These settlements are taxed as a long-term gain. Look for the LTCG answer.

146
Q

T or F: the surrender of a life insurance policy is subject to ordinary income, and in some cases an additional 10% penalty.

A

T

CV - Basis (premiums paid) = Taxed at OI

147
Q

What is the difference between a MEC in a non-MEC?

A

The main difference is that loans and withdrawals have no effect on non-MEC contracts. The death benefit is excluded from income for either MEC or non-MEC.

148
Q

FSA Keys 5

A
  • No Income tax, FICA, FUTA
  • No LTC.
  • Not an HSA
  • DCFSA: use it or lose it by 12/31
    -MFSA: could allow for 2.5 month grace period until March 15th.
149
Q

MFSA

A
  • $3050 cap
  • there is a 2 1/2 month grace period, or $610 rollover option
150
Q

DCFSA

A
  • max tax-free reimbursement is $5000 per year.
  • any tax free reimbursement from the account reduces the expense eligible for the dependent care credit.
  • no grace period, use it or lose it by 12/31.
151
Q

Qualifying expenses for AOC and LLC

A

Tuition, fees, supplies, books, and equipment.

Not room and board.

152
Q

Will IRAs owned by parents or students count towards determining EFC for purposes of financial aid?

A

No. Life insurance cash values are not generally counted as assets either.

153
Q

Do FSAs, HSAs, and HRAs all allow employer contributions?

A

Yes they all allow it, except HRAs are solely employer funded.

154
Q

Guaranteed insurability option for life insurance

A

You can purchase the rate to require additional insurance, and specified amount, as specified times are ages. No exam required.

This is different than guaranteed renewable for disability policies.

155
Q

Taxation of whole life insurance:

A

When net cash value is provided, factor in the outstanding loan.

Net cash value + outstanding loan = ACV

156
Q

Group permanent life insurance

A

A group permanent policy does not meet the requirements to be treated as group term life insurance. The employee will be taxed W-2 income on the premiums paid by the employer, if the proceeds are payable to the beneficiary named by the employee. The premiums are deductible by the employer.

157
Q

Whole life policy withdrawal vs policy Loan

A

A withdrawal can be made up to the total amount of premiums paid “basis”.

A loan is a interest bearing withdrawal up to the total amount of cash value in the policy.

Check back in the example in the book. Net cash value plus the outstanding outstanding loan at policy surrender is the amount of “value”. Subtract the basis and the remainder is taxed at ordinary income.

158
Q

Taxation of whole life at surrender? When there is a loan involved?
- what is received?
- what is taxes?

A

No loan involved:
- The investor will receive CV.
- CV - Basis = taxed at Ordinary Income.

When there is a loan involved:
- The investor will receive the remainder of CV in excess of the outstanding loan. The investor already has possession of the loan, so the remainder of CV will be given, which will total the amount of CV.
- CV - Basis = taxed at Ordinary Income.

Remember that loans can only come from cash value.

DANKO CFP FC REVIEW (7 decks)

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