Insurance Planning Flashcards
Homeowner’s Insurance Policy
Property (Part 1): Coverage A, B, C, & D
Liability (Part 2): Coverage E & F
HO-2
Basic Homeowners coverage
HO-3
Better Homeowners coverage
HO-4
Renters insurance
*4 Rent
HO-5
Best Homeowners coverage
*provides open perils coverage automatically for dwelling and contents!
HO-6
Condo insurance
HO-8
Older/historical coverage
Open perils coverage means
Everything is covered, EXCEPT things specifically excluded
HO-3 has open perils for dwelling and named perils for the contents
HO-5 has open perils for contents
Named perils coverage means
Only perils that are covered are perils that are listed
Peril
Actual cause of the loss, directly listed in the policy
ie: Fire
We are insuring against a loss caused by fire
Hazard
Something that increases the probability that a loss will occur due to a peril
ie: gasoline soaked rag
Section of HO Policy: Coverage A
Address: for the dwelling itself (structure)
Section of HO Policy: Coverage B
Backyard
Section of HO Policy: Coverage C
Crap: all your things, electronics, housewares, etc.
Section of HO Policy: Coverage D
Displacement: when the family is displaced for a period of time when the home is being repaired or replaced
Section of HO Policy: Coverage E
Exposure: Exposure to legal action, some liability insurance
*when dog bites mail person
Section of HO Policy: Coverage F
Funds: for others for fractured femurs, money available to pay smaller types of expenses
*someone breaks their arm at a BBQ
Homeowners insurance policy coinsurance requirement
Dwelling must be insured for at least 80% of the replacement cost value for a partial loss to be PIF
*may see in a case study
Homeowners coinsurance formula:
(“did have” / “should have” x loss amount) - deductible
house replacement cost = $500,000
dwelling coverage = $350,000
loss amount = $100,000 (damage from fire)
deductible = $1,000
$500,000 x 80% = $400,000
$350,000/$400,000 x $100,000 - $1000
coverage for $86,500
Personal automobile policies (PAPs) part A is for
Liability
Personal automobile policies (PAPs) part D is for
Damage to your auto
What are the coverage areas for PAP
ie: $250,000/$750,000/$100,000
$250,000/$750,000/$100,000
$250,000 = max bodily injury
$750,000 = max all bodily injuries
$100,000 = max property damage
What is Part D collision coverage?
Collision: damage to vehicle caused by an accident
What is Part D comprehensive coverage?
Comprehensive: all other physical damage to the auto
What type of claim should a driver file if they hit a deer?
The driver would file a comprehensive claim
Umbrella insurance typically requires a minimum of __________ coverage E homeowners insurance and a minimum _________ of part A auto insurance
$200,000 minimum for coverage E homeowners insurance and $300,000 minimum of part A auto insurance
If employer pays disability premiums then the benefits received are…
Taxable to the insured employee
If the employee pays premiums with after-tax dollars then…
Benefits are tax-free
If employer pays the premium but includes the premium amount as compensation to the employee the benefits are…
Tax-free
If the premium is paid with pre-tax dollars, benefits are…
Taxable
Under COBRA, the maximum period of continuation coverage for an employee who meets the social security definition of disability is…
29 months!
Under COBRA, the termination of the employee for any reason except gross misconduct is eligible for a continuation of coverage for
18 months
COBRA rules apply to employers with
20 or more employees
*part time staff counts as 1/2
What are the triple tax advantages of an HSA?
- Pre-tax contributions
- Tax-deferred earnings
- Tax-free distributions
May make one direct transfer from IRA to fund HSA…
up to the annual limit!
What is the last month rule for HSA?
If eligible under HDHP on the the 1st day of the last month of the tax year (12/01), you may fund your HSA for the entire year
If the employer is contributing to an employee’s HSA remember that…
The employer contribution will deduct from the total amount the employee can contribute to the HSA
maximums are: $3650/$7300
Once someone goes on Medicare can they contribute to a HSA?
No, once someone is enrolled in Medicare you can’t contribute to a HSA
What can you use your HSA for?
OTC drugs, dental, and vision
Do HSAs have a use it or lose it rule?
NO, HSAs do not have the use it or lose it rule like the FSA!
In order to have a HSA you need to meet BOTH requirements…
- the MINIMUM deductible (can be over the minimum) $1400/$2800
AND
- the MAXIMUM out of pocket amount (CANNOT be over the max amount) $7050/$14100
What is the cost of Medicare coverage for nursing home skilled care for Days 1-20?
$ zero co-pay for each benefit period for Days 1-20
Does Medicare pay for LT custodial care?
NO, it pays for skilled nursing care for a limited time following a hospitalization
What are the 3 categories of life insurance?
- Term Life Insurance
- Universal Life Insurance
- Whole Life Insurance
What are the benefits of term life insurance?
large amount of coverage and low initial premiums
What are the benefits of whole life insurance?
most guarantees
What are the benefits of universal life insurance?
Most flexible
Which universal life option includes cash value + the face amount in the death benefit?
Option B
Which universal life option’s death benefit remains level?
Option A
Static death benefit, will always pay the stated death benefit
What is unique about variable life insurance policies?
Variable policies have cash value sub-accounts and give policy owners investment choices
Sub accounts are separate from insurance company’s sub accounts and the $ is NOT accessible to creditors
Gains distributed from a non-qualified annuity (purchased with after tax dollars) is taxed as…
Ordinary income
*distributed gains are subject to a 10% early withdrawal penalty prior to age 59 1/2 unless an exception applies
If a client makes withdrawals from an annuity, how is it taxed?
Distributed on a LIFO basis
Last in First Out
Distributing all the gains first before distributing basis!
Any money being withdrawn from an annuity is taxed as…
ordinary income
If the annuity contract is annuitized then there is an ___________________
Exclusion allowance
Does NOT apply to just withdrawals before annuitization
What is the exclusion allowance formula for annuities?
Exclusion allowance formula =
investment in contract / guaranteed annual payment x life expectancy
Don’t forget to multiple by 12 if it’s more than a year!
Amount is the amount that is tax-free
*You may need to subtract the amount out to find the taxable amount
If the annuitization happened prior to 12/30/1986 then the exclusion allowance lasted for…
LIFE, even after basis is recovered
Annuity Contracts purchased before 8/14/1982 were distributed on a…
FIFO basis
Annuity Contracts purchased after 8/14/1982 were distributed on a…
LIFO basis
What is used primarily to defer current taxation in the exchange of life insurance and annuity contracts?
Section 1035 exchange
tax-free exchange between insurance products
How many months of COBRA coverage are you eligible for if the employee enrolled in Medicare?
36 months
How many months of COBRA coverage are you eligible for if there is a divorce or legal separation?
36 months
How many months of COBRA coverage are you eligible for if the employee dies?
36 months
How many months of COBRA are you eligible if there is a loss of dependent child status under the plan?
36 months
There is NO obligation for employers to cost share for COBRA but the cost cannot exceed…
102% of costs paid by the employee and employer
What is a viatical settlement?
Way for a seriously ill person to get cash by transferring a life insurance policy to a viatical settlement company in exchange for cash of a discounted amount of the death benefit
In order to get a viatical settlement you must be…
terminally ill: individual who has been certified by a physician as having an illness or condition that can reasonably be expected to result in death within 24 months of the certification date
or
chronically ill: person who is unable to perform at least 2 activities of daily living
A viatical settlement provider must grant a…
15 day cooling off period during which the viator can rescind the viatical agreement
With a viatical settlement the policy owner receives…
cash settlement
*note the amounts received under a life insurance policy contract for terminally ill/chronically ill are excluded from gross income!
If the individual is ONLY chronically ill the benefits will only be excluded from income to the extent they are used for LT care services (otherwise they can be taxed)
With a viatical settlement the viatical settlement company receives…
ongoing premiums and future death benefits
*at insured’s death the amount received in excess of the basis is taxable to the viatical settlement company
**the cash settlement amount paid to the insured + any subsequent premiums paid by the company is basis
If you are terminally ill how much of the proceeds of a viatical settlement are taxable?
ALL proceeds of a viatical settlement are tax free! Even if the proceeds are used for non medical expenses!
What are 6 activities of daily living?
BED COT
Bathing
Eating
Dressing
Continence
On/off toilet
Transferring
What are the long term care benefit triggers
Option 1:
Unable to perform 2/6 ADL for more than 90+ days
Option 2:
substantial cognitive impairment
*Note BOTH require dr certification!
Are blindness and the inability to walk long term care triggers?
NO!
Walking and blindness are not 6 of the ADLs
What is partnership long term care insurance?
Partnership between states and insurance companies for qualified LTCi
Provides additional asset protection if LTCi benefit is exhausted and insured files for Medicaid
Total amount paid under LTCi is added to Medicaid spend down limit and protected
What is the pool concept in long term care insurance?
Multiply daily benefit X # of days in the policy period and that are in the pool!
What are the types of life insurance non-forfeiture options?
- Cash value surrender
- Extended-term option
- Reduced paid up insurance
A cash value life insurance policy that fails the 7 pay test and changes the tax treatment of cash distributions while the insured is alive
Modified endowment contract (MEC)
Does the tax treatment of the death benefit under a MEC change?
No!
The death benefit from a MEC is always received tax free
What is the tax treatment for distributions and loans on a MEC?
LIFO
Distributions are always treated as ordinary income and there may be a 10% penalty if there is a withdrawal before 59.5
How many buy sell policies would be needed for a cross purchase agreement?
n x (n-1)
n = # of owners, partners, or shareholders
ie: 8 owners
8 (8-1) = 56 policies
Buy sell method to completely transfer business interests among partners using life insurance policies. Owners agree to buy and sell their respective business interests up death, disability, or retirement.
Cross purchase agreement
What are the pros of a buy sell cross purchase agreement?
-simple solution for businesses with few owners
-death benefit passes tax-free to surviving owner
-increase in basis to the surviving owner (PRIMARY ADVANTAGE)
What are the cons of a buy sell cross purchase agreement?
-if there is a big age gap, younger owners will pay a lot more in premiums
-difficult to implement with high # of owners
Method to completely transfer business interests back to the business using life insurance policies. The business purchases policies on the owners and uses death benefit proceeds to buy back ownership shares upon death of a partner.
Entity purchase agreement
What are the pros of a buy sell entity purchase agreement?
-preferred solution for businesses with multiple partners
-death benefit passes tax-free to business
-business pays policy premiums
What are the cons of a buy sell entity purchase agreement?
-NO INCREASE IN BASIS to surviving owner
-surviving owner will have substantially more gains upon sale of business
With an entity purchase agreement the number of policies needed is…
equal to the number of partners/shareholders
Method to transfer business interests that offers flexibility to both partners and business as they purchase interests upon death, disability, or retirement.
Buy sell wait and see agreement
What are the steps in a buy sell wait and see agreement?
- business has 1st option to purchase the deceased partners stock
- surviving partners have the option to purchase the deceased partners stock
*applies if business waives the option to purchase in step 1
**the business purchases less than half of the deceased partners stock
- business is required to purchased the deceased partners stock
wait and see BOB
business –>owner–>business
What is an equity indexed annuity?
Fixed annuity with minimum guaranteed return, but the return is linked to S&P 500
Variable annuity accounts can…
go down!
What is the lookback period for Medicaid?
5 years
To ensure you haven’t gifted all your resources away!
What is any occupation disability insurance?
least favorable definition of disability that could be in a policy for the insured
*it makes it really difficult to qualify for benefits because they have to be unable to engage in any occupation!
What are the pros of any occupation disability insurance?
Low premiums because you are less likely to qualify for a claim
What is own occupation disability insurance?
Most favorable definition of disability for the insured because the insured is unable to perform THEIR OWN occupation
ie: surgeon who is unable to perform surgery
*these policies can be very expensive!
If the insured forgets to pay the premium or decides to end the contract, the grace period provides _______ days to pay the premium without forfeiting any contractual rights and no questions asked.
31 days!
Which life insurance is referred to as pure protection?
Term life insurance
because it pays a death benefit only and has NO savings component
What is the penalty for making a distribution from your HSA for non qualified medical expenses?
The distribution for non qualified medical expenses are subject to ordinary income AND a 20% penalty
What are the phases of an annuity?
- the accumulation phase
- the distribution phase
Qualified long term care insurance must not…
require prior hospitalization
A standard HO-5 policy typically provides coverage for contents at a limit of _______ of the Part A dwelling coverage
50%
What is the primary reason to use a Section 1035 exchange?
The primary objective of using a section 1035 exchange in the change of life insurance policies is to defer recognition of gain in a policy in which the surrender value exceeds the basis
If the beneficiary does not take the death proceeds as a lump sum of cash and instead takes a series of payments that includes interest earnings…
there is federal income tax on the interest portion!
Which life insurance policy non-forfeiture option provides the largest death benefit?
Extended term non-forfeiture provides the largest death benefit because the original face amount of the policy is continued for a period determined by how long the cash value will pay for the coverage.
Which approach to risk management tends to be the default strategy?
Risk retention-done unconsciously and unintentionally by not being aware of certain risks
Which of the following life insurance nonforfeiture options allows the policy owner to continue to make policy loans?
Reduced paid up status maintains CV which is available for policy loan, but any loans at death are deducted from the reduced paid up death benefit
What can be paid from your HSA?
-dental expenses
-HDHP co-payments
-LT care insurance premiums
