Insurance Planning Flashcards
4 Elements of Insurable Risks
1) Sufficiently large number of homogeneous exposure units
2) Loss produced by risk must be definite and measurable
3) Loss must be fortuitous or accidental
4) Loss must not be catastrophic to the insurance company
Advantages of Self Insurance
1) Avoid cost associated with commercial insurance
2) Reserves held for claims can be invested in short-term MMs, and earnings can offset program costs.
Disadvantages of Self Insurance
1) Can leave company exposed to catastrophic loss
2) Company must duplicate services of insurance company
3) Company may have to pay income taxes on reserves held at year end
When a small company self-insures up to a certain point but acquires insurance to pay for claims above that, this is called _____.
Stop loss coverage (also partially self-funded plan or cash flow plan)
5 Methods to Control Losses
1) Avoidance
(don’t buy house with a pool)
2) Diversification
(duplicate assets across locations)
3) Risk Reduction
(sprinkler or burglary systems)
4) Retention
(deductibles & self insurance)
5) Transfer
(purchase insurance)
For risks that involve high loss severity and low loss frequency, the most suitable technique(s) is/are probably _____.
Risk Transfer (i.e. insurance)
For risks that involve high loss severity and high loss frequency, the most suitable technique(s) is/are probably _____.
Avoidance (because premiums would be very expensive)
For risks that involve low loss severity and high loss frequency, the most suitable technique(s) is/are probably _____.
Retention and reduction (because high frequency will make a transfer costly)
For risks that involve low loss severity and low loss frequency, the most suitable technique(s) is/are probably _____.
Retention
The principle underlying most insurance contracts where the insurer seeks to reimburse the insured for approx. the amount lost (but no more, no less) is called _____.
Principle of indemnity
A right or relationship with regard to the subject matter of an insurance contract such that the insured will suffer financial loss from damage, loss, or destruction of that subject matter is called _____.
Insurable Interest
Insurable interest must exist at the time of _____ for property/casualty insurance.
For life insurance, it must exist at the time of _____.
Loss; issue
When only a president, VP, or secretary can alter a contract, this is called _____.
Waiver Provision
_____ is represented by the fact that an insured may pay a large premium and never receive proceeds, whereas another insured may pay only a small premium and receive a large settlement. In other words, the outcome is affected by chance.
Aleatory
The process by which an insurer takes over the legal rights its insured has against a responsible third party is called _____.
Subrogation
Medicare Part A
-Hospital Insurance (think Ambulance)
-For everyone 65+ who is also eligible for SS benefits
-Disabled workers at any age
-Disabled widows/widowers age 50+
-Free to anyone who has paid Medicare taxes for more than a decade (or married to someone who has)
Medicare Part B
-Same eligibility as Medicare Part A
-Health Benefits (think Benefits)
-Pays 80% of the balance of approved charges
-No stop loss applies
-Unique Coverage: doctor-administered drugs, free preventive care services,
-Exclusions: Dental, Vision, most immunizations (except yearly flu shot), prescription drugs
-Charged a monthly premium based on income (IRMAA- Income Related Monthly Adjustment Amount)
-Will be penalized if you do not sign up at 65, with one primary exception
Even if you are working and have health benefits, you need to sign up for Medicare Part A at age _____.
65
Once covered under Medicare Part A, you lose the ability to _______ an HSA plan.
Contribute to
The one circumstance where people can avoid signing up for Medicare Part B at age 65 is _____.
When they have health insurance through their own or a spouse’s current job at a workplace with 20+ employees.
Medicare Part C
-AKA Medicare Advantage
-Covers Parts A and B (A+B=C)
-Issued through a private Company (C for Company)
-May cover vision, dental, or other items typically excluded
Medicare Part D
-D for Drugs
-Must have Part A and B to get Part D
HMO’s
-Primary care doc is the gatekeeper
-Must use doc affiliated with the HMO
-Monthly fee paid to provider
PPO’s
-Generally paid on fee-for-service basis
-Can go to doc outside of network (but generally at reduced benefits)
COBRA
-Small companies (fewer than 20 EE’s for at least half of prior year) are exempt
-Qualifying events based on life events
HSA’s
-Can be used to pay for Medicare, prescription drugs, COBRA, LTC premiums, health plan coverage while receiving unemployment
-CANNOT pay for Medigap premiums
-Can transfer upon death to spouse on tax-free basis (spouse can treat as his/her own account)
Where is Medicare coverage not available to cover medical costs?
Outside of the US and limited areas of Mexico, Canada, or the Caribbean
Types of Disability Insurance
-Own Occupation (best)
-Any Occupation/Modified Any Occupation/Modified Own Occupation
-Split Definition
-Loss of Income
Disability polices cannot be modified to higher amounts or used in 1035 exchanges.
True
Provisions of Disability Insurance
-Noncancellable: keep the policy in force by paying fixed premium; normally renewable to age 65 or retirement
-Guaranteed Renewable: keep the policy in force by paying premium (which may increase based on class)
-Conditionally Renewable: Allows noncancellable or guaranteed renewable to continue beyond age 65 (up to 2 years if insured is still an active EE); normally in all DI policies
Riders of Disability Insurance
-Residual Disability (Proportional): Benefit is payable in proportion to the insured’s reduced earnings; usually in an own occupation policy
-Social Insurance Substitute (SIS): The SIS portion is reduced by the amount of any Social Security Disability benefit received (NOTE: the base amount of the policy is NEVER reduced)
Disability Insurance: Taxation of Premiums and Benefits
If EE owns the contract and pays the premium…
-Premiums are not tax deductible
-Benefits are tax-free to the EE
Disability Insurance: Taxation of Premiums and Benefits
If EE owns the contract and ER pays the entire premium (using a Section 162 arrangement)…
-Premiums are deductible by ER as a bonus
-Premiums are taxed as a bonus to EE
-Benefits are tax-free to the EE
Disability Insurance: Taxation of Premiums and Benefits
If EE owns the contract and ER pays the entire premium under a Salary Continuation Plan…
-Premiums are deductible by ER
-Premiums are not currently taxed to the EE
-Benefits are taxable to the EE
NOTE: with shared premiums (EE and ER pay), benefits will be partially tax-free
Disability Insurance: Taxation of Premiums and Benefits
For Partnership and S Corp Shareholders (greater than 2%)…
Partnership/S Corp can deduct premiums paid for coverage; this is based on premium cost being included in taxable income of partner/shareholder; proceeds are excludable from taxable income.
Most LTC Policies qualify for the same tax treatment as medical insurance policies…premiums are _____, and benefits received are not _____.
Deductible; taxable
Chronically Ill Person: unable to perform at least how many activities of daily living (ADLs) and for what period?
2 activities; at least 90 days
The ideal compromise between cost and coverage of a LTC policy is coverage in the ______ year range.
5-7 years (allows chance to qualify for Medicaid after 5 years with no assets)
LTC: premiums paid and unreimbursed expenses for qualified LTC services are OR are not deductible as itemized medical expenses.
Are deductible (subject to dollar amount limitation that increases with the age of the insured)
LTC: Skilled Nursing Coverage
-First ______ days paid in full by Medicare.
-Days ______ require a copayment.
-After _____ days of coverage, patient must pay full cost.
-First 20 days paid in full by Medicare.
-Days 21-100 require a copayment.
-After 100 days of coverage, patient must pay full cost.
Miller Trusts and Medicaid
The MT can be used as a place for income over Medicaid’s limit so that such income does not count against the applicant for Medicaid eligibility. NOTE: MTs are NOT for assets; just income (such as SS). When the Medicaid beneficiary dies, state is named as remainder beneficiary of trust.
A health FSA (can/cannot) offer both a carryover and a grace period.
Cannot
Dependent Care FSA’s can be used for eligible expenses for care of…
-dependent children under age 13
-dependent (spouse or child) of any age who is mentally or physically incapable of caring for self
Group Term Life Insurance & Taxation
What’s the magic number/threshold, and what happens if the plan is discriminatory?
-If EE’s total coverage is less than $50k, EE is not taxed on premiums paid by ER.
-If EE’s total coverage is more than $50k, EE is taxed on cost of coverage over $50k less amount EE paid.
NOTE 1: premium is deductible by ER.
NOTE 2: If plan is discriminatory, each key EE must include greater of actual cost of insurance or cost determined from Table 1. Key EE’s lose their $50k exemption.
Group Term Life Insurance coverage is tax free for spouse up to what amount?
$2,000
