Insurance Planning Flashcards
Basic Insurance Concepts
Risk
A condition where there is a possibility of loss (a situation where an
exposure to loss exists)
• Starting a business
• Buying real estate
Basic Insurance Concepts
Peril
The cause of a possible loss, the event insured against perils like windstorm,
fire and theft.
Basic Insurance Concepts
Hazard
A condition that may create or increase the chance of loss arising from a
given peril like:
• Owning a home on a earthquake fault line
• Owning a home by a river
Elements of Insurance
- Large number of homogeneous exposure units
- Loss must be definate and measurable
- Must be fortuitous or accidental
- Must not be catastrophic (for the insurance company)
Methods to Avoid/Reduce Loss
Methods are:
- Avoidance: (do not drive, do not purchase property but rent
it) - Diversification: duplication of assets or activities at different locations
- Transference: INSURANCE
- Retention: voluntary - recognizes that the risk exists and assumes losses (deductible, co-insurance)
- Risk reduction: (sprinkler system, safety programs)
Insurable Interest
Property/Casualty: At inception and at time of claim
Life: At inception but need not be at time of claim
Parts of the Insurance Contract
Declarations Page: Factual statements that identify the specific person, property or activity being insured
Definitions: explanation of key policy terms
Insuring agreements: spells out the basic promise of the insurance company
Conditions: spells out in detail the duties and rights of both parties
Exclusions: circumstances when the insurer will not pay
Remember “DICE”
Negligences
• Attractive nuisances (swimming pool/vacant lot)
• Negligence per se (violate a statute)
• Strict liability (product liability)
• Absolute liability (workers compensation)
• Vicarious liability - respondeat superior (principals responsible for their
agents)
Defenses
- Assumption of risk (skiing, stock car races)
- Contributory (jay walking, being drunk)
- Comparative (A is 20% negligent, B is 80%)
- Last clear chance (road rage)
Calculating Life Insurance Needs
two methods
- Capital utilization approach: uses annuitization to provide needed
income but leaves no money at the end of planned for period - Capital needs approach: uses interest only, so the original capital is
still left at the end of income period (also called capital retention or
interest only)
Insurance Rating Service/Category
most comprehensive service
- A.M. Best / A++ to F
* Standard & Poor / AAA to CCC
Sections of Homeowner’s Policy
Section I (Coverage: A B C D) A - dwelling and attached structures B - structures separated from dwelling (detached garage, fences) C - contents and personal property D - loss of use Section II (Coverage: E F) E - liability F - medical payments
Property Excluded Under
Personal Property Coverage
- 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)
Perils Covered
Basic Form
The policy lists the perils covered
(WHARVES/FLT)
Windstorm, Hail, Aircraft Riot, Vandalism, Vehicles,
Explosion. Smoke, Fire, Lightning, Theft
Perils Covered
Broad Form
The policy lists the perils covered
(Basic plus RAF)
Rupture of a system, Artificially generated electricity, Falling objects,
Freezing of plumbing
Homeowner’s Forms of Coverage
Forms Dwelling Structures Contents Loss of Use Coverage A B I C D HO-I Basic Basic Basic Basic HO-2 (home) Broad Broad Broad Broad HO-3 (home) Open Open 10% A Broad 50% A Open 30% A Open 30%A HO-3 / 15 (home)/ HO-5 Open Open Open 10%A 50%A HO-8 (older home) Basic Basic I Basic Basic HO-4 (renter's) Broad Broad 30% C HO-6 (condo owner) 0« 4.* I Open Broad 50% C
Homeowner Policy Exclusions
- Earthquake
- Flood
- Neglect
- Intentional Loss
- Ordinance/Law
- Power Failure
- War
- Nuclear Hazard
- Sink hole is a covered peril for the exam
Replacement Cost Coverage
Replacement cost x Coinsurance percentage = Insurance required
Insurance carried x Loss - Deductible = Amount Paid by Insurance
Insurance required
Automobile Risk Exposures
Requirements for a vehicle to be eligible for:
Insurance Services Office (ISO)
Personal Auto Policy (PAP)
• Be owned by an individual or by a husband and wife living in the
same household
• Be a private passenger automobile
• Not be used as a public or livery conveyance
• Not be rented to others
Auto Insurance Policy Parts
- Part A - limited to third parties
- Part B - medical payments
- Part C - uninsured / underinsured motorists
- Part D - damage to the covered auto
“Covered Auto” as used
under the policy
• Any vehicle shown on the declarations page
• Any of following vehicles which you acquire during the policy period: private
passenger auto, pickup truck, panel truck or van
NO coverage for a pickup, panel truck, or van used in a business (need
commercial policy)
• Any trailer you own listed on the declarations page
• Any auto or trailer you do not own while used as a temporary substitute for
any vehicle described in this definition which is out of normal use because of
a breakdown, repair, servicing, loss or destruction
Persons insured under the medical
payments coverage of the PAP
• The named insured and any family member who suffers bodily injury
caused by accident while occupying the covered auto
• 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 occupant of the insured’s auto (passengers)
Uninsured Motorist Coverage
UM
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. The term
“covered person” as used under the uninsured motorist coverage of the Personal
Auto Policy includes the following:
• The named insured and any family member
• Any other person occupying the insured’s covered auto
• Any person, for damages that person is entitled to recover because of injury
to a person described above
Special Note: Uhl is liability protection. NOT medical payments
Perils Covered Under the
“Other Than Collison”
Provision of the Auto Policy
. Breakage of glass . Loss caused by: 1. Falling Objects 2. Fire 3. Theft 4. Explosion 5. Earthquake 6. Windstorm 7. Hail 8. Water 9. Flood 10. Riot or civil commotion 11. Contact with birds or animals
Umbrella Liability Insurance
• Nearly always a correct answer, since it is smart coverage
• Provides liability coverage (BI/PD) for catastrophic legal claims
• Requires policy owner to carry certain underlying coverage of
specified minimum amounts
• Professional acts are specifically EXCLUDED
Professional Liability
Malpractice: bodily injury (doctors, dentists)
Errors and Omissions (E&O): Monetary damages (financial advisors,
lawyers, accountants, insurance agents, etc.)
Workers Compensation
- Unlimited Medical Expenses
- Disability income (TAX FREE)
- Death benefits
- Rehabilitation (medical and vocational)
- Absolute Liability
Medicare
does NOT cover
• Routine foot care, glasses, hearing aids and dental work
• Emergency care outside the U.S. (except Canada, Mexico, and
Caribbean)
Medicare - Long Term Care
- 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 (maximum 100 days) - This limited benefit is subject to substantial restrictions:
-Pays for skilled care only
-Admission to a nursing home must follow within 30 days of a hospital stay of
three days or more
-The patient’s condition must be expected to improve
HMO vs. PPO
HMO:
• Provider paid monthly fee regardless of services
rendered (capitation)
• Out-of-network care not covered at all
PPO:
• Provider paid for actual services rendered
• Out-of-network partially covered (usually 70%)
COBRA Coverage Requirements
Must have 20 full/part time employees The option to buy continuation - Coverage must be offered to: "qualifying event" terminated employees/dependents continuation period- up to 18 months voluntary or involuntary termination change from frill-time to part-time spouses and other dependents continuation period- up to 36 months employees death,divorce, legal separation or eligibility for Medicare Children of employees continuation period- up to 36 months Loss of dependent status (marriage) reaching dependency age limit specified by plan
Health Savings Account
HSA
• Used in conjunction with High Deductible Health Plan (HDHP)
• Distributions tax-free if used for health care
• Contributions not spent are carried forward in the owners name and
are portable
• Unused assets become property of named beneficiary upon death
• Distributions for non-medical are ordinary income taxable plus 10%
penalty if under 65
Definitions of Disability
- Own occupation - best definition for insured
- Modified any occupation
- Split definition - own then modified
- Any occupation (social security definition)
- Loss of income
Disability Income
Policy Continuance Provisions
Noncancellable "noncan": continuous term policy guaranteeing the insured's right to maintain the policy at the stated premium Guaranteed renewable: continuous right to maintain the policy, but the insurer may increase the premium by class of insureds
Taxation of Disability Policies
Taxation of premiums and benefits
The individual owns the contract and pays the premium.
-Premiums are not deductible.
-Benefits are tax-free to the employee
The employee owns the contract and the employer pays the entire
premium under a bonus arrangement like Section 162 disability insurance.
-Premiums are deductible by the employer as a bonus.
-Benefits are tax-free to the employee.
The employee owns the contract and the employer pays the entire
premium under a salary continuation plan (group plan).
-Premiums are deductible by the employer.
-Benefits are taxable to the employee.
Permanent Life Insurance -
Low risk tolerance
• Insurance company controls investment return
• Assets part of general account
1. Whole Life
2. Universal Life
Permanent Life Insurance -
High risk tolerance
• Client controls investment return
• Assets part of separate account
1. Variable Life
2. Variable Universal Life
Dividend Options
. Cash . Reduce premium . Accumulate with interest . Paid-up additions . One-year term / 5th dividend
Nonforfeiture Options
- Cash
- Extended term
- Paid Up Reduced Amount
Settlement Options
- Cash
- Pure life/single life
- Refund
- Period certain
- Specified income/period
- Interest only
Modified Endowment Contract
MEC
• Entered into after June 21,1988
• Fails to meet the “seven pay test” (for exam includes ALL
single premium policies)
• Distributions/withdrawals are taxed LIFO (interest
first)
• Distributions under 591/2 also subject to 10% federal penalty
tax (if not disabled)
• Death benefit is tax-free
“MEC” Grandfather
Life Insurance Rules
. If the death benefit increases by $150K or less and the insured has
guaranteed insurability (no proof of insurability), the policy will NOT
lose its grandfathered (non MEC) status.
. If the policy increases by ANY amount and the insured must prove
insurability, the policy MAY lose its grandfathered (non MEC)
status.
Proceeds Taxable due to
Transfer for Value
If an interest in a life insurance policy is transferred for valuable consideration (not a
gift), the proceeds in 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
three main exceptions to this rule are as follows:
• A sale or transfer to the insured
• A sale or transfer to a partner or partnership in which the insured is a partner
• A corporation in which the insured is a shareholder or officer
• Divorce
1035 Tax Free Exchange Rules
Life —> Life (OK)
Life —> Annuity (OK)
Annuity —> Annuity (OK)
Annuity –> Life (NO NO NO)
Buy Sell
Stock Redemption
vs.
Cross Purchase
Stock Redemption: No step-up in cost basis
Cross-Purchase: Step-up in basis
Split-Dollar Insurance
EndoRsement Method
vs.
Collateral aSSignment Method
EndorRsement Method:
• EmployeR is the owneR
• Employee is not a shareholder
Collateral aS Signment method:
• Employee is owner
• Employee is a Shareholder
• Employee aS Signs the policy
Annuity Taxation
Periodic Payouts Basis = Tax-Free Payout Lump Sum payouts LIFO (interest first rule) Ordinary income plus 10% penalty under 59 1/2
Flexible Spending Account
FSA
• Must be used by March 15th or forfeited to company (use it or
LOSE it - Medical Only)
• Not subject to income tax, FICA, FUTA
• Health FSA may not be used to reimburse an employee premiums
paid for other health plans (such as a MSA, HSA, and LTC)
• Expenses for long-term care services cannot be reimbursed under a
health FSA, but other medical expenses can be reimbursed
Fringe Benefits Tax-Free
major ones
• Health care premiums
• Insurance premiums on non-discriminatory group life policy up to
• $50,000
• Company car for working conditions only
• Employer-provided transit passes ($130/ month cap) or parking
($250/month cap)
• Occasional overtime meal money, cab fare, theater or sporting
event tickets
• Discounts on services limited to 20% of selling price charged
customers
Fringe Benefits Taxable
Health insurance premiums paid for self-employed, partners, and more than
2% owners of S corporation are taxable income. 100% is deductible as an
adjustment to income on the front of the 1040. This can include all types of
health insurance programs.
