Insurance Planning Flashcards
Types of Risk
- Pure: chance of loss or no loss (insurable)
- Speculative Risk: chance of loss gain or no loss (uninsurable)
Fundamental vs. Particular Risk
Fundamental:
- Risk that can impact a large number of people. E.g natural disaster
- Difficult for insurance companies to insure
Particular:
- impacts one person
Subjective vs. Objective Risk
- Subjective is based upon the individual’s perception of risk.
- Objective risk is the difference between an actual loss from expected loss
Nonfinancial vs. Financial Risk
- Nonfinancial results in a loss that is not monetary
- Financial risk results in money being lost
Probability of Loss
- the chance of a loss occuring
- greater the sample size, the more efficient
- the more measurable the loss, the more efficient the premiums
- life insurance is efficient; long-term care is not
Law of large numbers
- the more often an event occurs, the more likely that the true probably will reveal itself
- helps reduce objective risk
Peril
- The actual cause of the loss: fire, wind, earthquake, etc.
Types of Hazards
- moral hazard: based on a character flaw (e.g. filing a false claim)
- morale hazard: the indifference created because person is insured (e.g. leaving car unlocked)
- physical hazard: a tangible condition that increases the likelihood of a peril occuring (e.g. icy road)
Requisites for an insurable risk (5)
- A large number of homogenous exposures
- Losses must be accidental from the insured’s view
- losses must be measurable and determinable
- losses must not pose a catastophic risk for the insurer
- premiums must be reasonable and affordable
Legal Principles of Insurance Contracts
- Mutual consent
- Offer and acceptance - automatic; sometimes conditional
- Performance or delivery - the party to a contract must perform a duty
- lawful purpose - must not be illegal
- legal competency - minor can’t sign contract
Indemnity
Insured is only entitled to compensation to the extent of the insured financial loss.
Subrogation clause
The insured can’t receive compensation from the insurance company and a 3rd party for the same claim.
Insurable interest
- The insured must have an emotional or financial hardship resulting from damage, loss, or destructive (related by blood, marriage, or business)
- Property and liability - must have an insurable interest both at inception and at time of loss
- Life insurance - only must have insurable interest at inception
Warranty
Warranty: a promise made to insurance company (e.g. installing sprinklers) by the insured.
Concealment
Concealment: being silent to a material fact
Adesion
Insured has no negotion power for any terms; rulings are usually in favor of insured if there is a gray area.
Aleatory
Aleatory: unequal exchange of mone
Unilateral
Only one promise in an insurance contract, which is made by the insurer and is to pay in the event of a loss
Law of agency
Agent is a legal representative of the insurer.
General agent - represents on insurer
Independent agent - represents multiple companies
Express, Implied and Apparent Authority
- Express: Authority given to the agent through the agency agreement
- Implied: Authority is perceived based on: signs on door, business cards, etc.
- Apparent authority; no authority exists; if incorrect representation is made by agent or agent is no longer affiliated with company, insurer is still responsible
Waiver and Estoppel
- Waiver: Relinquishing a known legal right
- Estoppel: Being denied a right that you would normally have. Applies when one person gives false information which causes harm to another person.
Types of insurance companies
- Stock insurance companies: Issue stock
- Mutual insurance companies: Owned by policy-holders, not shareholders
Underwriting
The process of classifying applicants into risk pools.
Adverse seletion
- The tendency for higher than average risks to purchase or renew insurance.
- Premiums depend upon the balance of favorable and unfavorable risks.
- Managed through underwriting by:
- raising premiums for high risks on front end
- raising premiums for high risks on back end
- denying insurance for high risks
Reinsurance
- used by insurance companies that don’t want to hold all the risk
- Insurer transfers the all or some of the risk to another insurer.
- reduces exposure to catastophic risk
Features of insurance contracts
- Definitions
- Declarations - amount of coverage
- Description of what is insured - listing of items/address
- Perils covered
- open perils - any kind of loss
- named perils - specific kinds of loss
- Exclusions
- Conditions - what insured and insurer must do
- Other provisions (errors of age/sex, suicide exclusion, payment of benefits (how/who paid), grace period - generally 30-60 days)
Riders and Endorsement
- Written additions to policy
- Customization of policy.
- Riders take precedence.
Deductibles
Amount insured has to pay before benefits begin
Help eliminate small claims
Copayment
Paid in addition to deductibles
Insured pays a portion of the losses
Coinsurance**
Helps deter undervaluation of property by insured (offsets having 300K insurance on a 500K property)
Amt. of insurance carried/(coinsurance*loss)=
amount of settlement, - deductible = amount paid
Pay the higher of the calculated amount or the depreciated amount (actual cash value)
See book example
Valuation of insured losses
- agreed-upon value (appraised art, antiques)
- replacement cost value
- actual cost value (ACV - replacement cost minus depreciation) (most auto policies)
State Insurance Commissioner
- Administers, interprets, and enforces insurance laws.
- NAIC - National Association of Insurance Commissioners - set watch lists, issue model legislation - do not have regulatory authority
Determination of life insurance needs
- Human Life Value approach: determine economic value of future earnings and subtract consumption of insured person
- Needs approach: estimates cash needs less social security (black-out period between when kids reach 18 and retirement age). Based on goals such as retirement, education, etc.
- Capitalized earnings approach: earnings ledd consumption and taxes adjusted for earnings/inflation
- Benchmark 12-18 times gross pay
Annual Renewable Term insurance
- Annual Renewable Term:
- premium increases annually
- fixed DB
- can be converted to a permanent policy w/out evidence of insurability
Universal Life (options A and B and variable)
- Premiums pay for administrative costs, commissions and CV
- Flexibility in premiums, face value, cash value
- cash value can be used to pay premiums
- Option A: Flexible premium; Beneficiary receives CV or DB
- Option B: DB vary with CV; Beneficiary receives CV and DB
- Variable: Insured directs investment of CV
Whole Life (Individual Life Insurance Policies)
Whole Life Dividend Options
- Cash
- Paid-up additional
- Increased cash value
- Reduce premiums
- One-year term (5th dividend)
Modified Endowment Contract
- Pay too quickly into life insurance policy
- Based on 7-pay test
- If fails test, taxed on LIFO (interest first) basis
- Taxed as ordinary income
- 10% penalty if under 59 1/2
- Rules have no effect on the policy unless insured is taking withdrawals
Taxation of Permanent Insurance
- Dividends
- if total dividends do not exceed premiums paid, not taxable (return of premium)
- if do exceed premiums, that amount is taxable
- If not a MEC, then taxed on a FIFO basis (basis first; If MEC, then taxed on a LIFO (interest first) basis
- Basis withdrawals not taxable
- Loans against CV not taxable
- For all insurance, if beneficiary is estate, may be subject to estate tax
Tax implications of surrender
- Lump sum - Amount in excess of premiums, taxable as ord income
- Interest only - taxable as ord income
- installments - interest is taxed as ord income
Life insurance premium taxation
- premiums not deductible by individuals
- group insurance premiums deductible (up to 50K in coverage - must pay tax on premiums that cover over 50K). Calculate inputed income.
- group WHOLE LIFE premiums paid by employer are taxable
Life insurance policy provisions
- Grace period usually 31-60 days - company will still pay out if death during grace period (minus premium due)
- Incontestability - after 2 years of insurance, company can’t cancel policy if they discover material misrepresentation, omission, or concealment.
- Misstatement of gender or age: DB adjusted for what premiums would have bought.
- Assignment: transferring rights of policy to another party (absolute - final or collateral)
- Suicide: coverage excluded within 1 or 2 years of inception
- Reinstatement: sometimes can be reinstated w/out evidence of insurability
- Policy loan provisions - If death occurs, loan amt plus accrued interest deducted from DB
Settlement options for life insurance
- Lump sum payment
- Interest only
- Annuity payments
- Fixed amount
- Fixed period
- Life income
- Life income with period certain
- Joint and last survivor income
Transfer for value taxation
- DB become taxable beyond basis except:
- transfer to the insured (if was a co. plan)
- transfer to a business partner
- transfer to a partnership
- transfer to a corporation of which insured is a shareholder
- transfer that results in a carryover basis from the transferor to the transferee
1035 Exchange
- exchange from one non-MEC policy to another is not a taxable event unless it is an annuity (generally taxed) exchanged for life insurance (generally untaxed)
Taxation of viatical settlement
- terminally ill person (die w/in 24 months) sells policy to another party, income not subject to tax.
- Purchaser incurs tax liability to the extent the proceeds (DB) of the policy exceed the purchase price and other costs (premiums)
Own occupation vs. any occupation
- own occupation: policy pays if you cannot perform the duties of your own occupation (expensive $$$)
- any occupation: policy pays if you cannot perform the duties of any occupation (inexpensive)
- split definition: pays for a fixed period of time using own occupation definitation and then uses any occupation definition.
Residual benefits of disbility
If insured goes back to work for reduced pay, pays the difference in salary.
Disability cost of living rider
- Future increase option rider: permits insured to increase monthly benefit as the insured gets older.
- Automatic increase rider: increases benefit by a set percentage every year
Taxation of disability payments
- if premiums are paid with after-tax dollars, benefits are not taxed
- if paid by employer with pre-tax dollars, benefits are taxed
Elimination period
- length of time between disabling event and payments begin
Disability integration with SS
Disability payments are reduced by the amount of SS received. Lower premiums for this.
Disability benefit period and waiver of premium
- short term: 2 years or less
- long term: coverage until normal retirement age, death or for a specified period of time.
- policy’s premium can be waived upon disability.
Disability desireable coverage
- 60-70% of income if not taxed
- work life expectancy (long-term)
- elimination period - based on emergency fund
- definition of disability - own occupation
- renewability - non-cancelable or guaranteed renewable
Types of annuities
- Immediate annuity: purchased with lump sum starts paying out immediately
- Deferred annuity: payments begin at future dates
- Flexible premium deferred annuity: pay more than once
- Single premium: lump-sum
Fixed vs. Variable Annuity
- fixed: single interest rate or guaranteed minimum rate; does not keep pace with inflation
- variable: investable; no guaranteed rate of return
Annuity Payments Timing
- Pure Life or Single Life Immediate Annuity: pays out for life; pays the most; no beneficiary (can’t leave to heirs)
- Life Annuity with Guaranteed Min. Payments: payments continue for a minimum term, payable to beneficiary or until death if beyond term.
- Installment Refund Annuity: Payments continue for a minimum term and if at death pay out less than paid in, give difference to benefiary
- Joint and Survivor Annuity: Payments are lower. Payments continue until death of 2nd annuitant.
Annuity Exclusion/Inclusion Ratio
- Exclusion ratio = taxable portion of annuity payments
Monthly payments x 12 months x life expectancy = total payments
Basis/Total Payments = exclusion ratio
Exclusion ratio x monthly payments = amount excluded from income
Payment - amount excluded from income = taxable amount s ordinary income
Taxation of annuities
- Withdrawals from annuities are taxed LIFO
Patient Protection and Affordable Care Act
- requires most citizens/legal residents to have health insurance
- large employers must offer coverage
- small employers incentivized to offer
- prohibits lifetime limits and annual limits
- no pre-existing condition clause
- plans categorized from bronze to platinum
Stop Loss vs. Maximum Out of Pocket
- Stop Loss:
- Maximum out of pocket in addition to the deductible
- Each family member must meet the deductible up to a max number of people
- Maximum out of pocket:
- includes deductible in max out of pocket expenses
Indemnity (Traditional) Health Insurance
Reimbursement for expenses
HMO
Health Maintenance Organization
- Group of physicians
- Referrals necessary
- Only network coverage
PPO
Preferred Provider Organization
- Larger provider pool than HMO
- Network doctors but can go out of network for more $
POS
Point of Service Plan
- Encourage primary care selection
- Has network but can go out of network with higher ded., copayments, coinsurance
Health Insurance Policy Provisions
- Incontestability clause: after policy has been in force for an amount of time, company can’t terminate contract
- Grace Period: Usually 31 days
Taxation of Health Insurance
- Benefits are tax free
- Employer-paid plans not taxed
Coordination of benefits
- prohibits collecting more than 100% of actual expenses
COBRA
Consolidated Omnibus Budget Reconciliation Act
- Employer may charge an additional 2% for administrative costs
- Eligibility:
- Death of covered employee
- Voluntary or involuntary termination
- Separation from spouse
- Medicare eligibility of covered employee
- Dependent child no longer eligible for employee-paid
- Do not have to offer coverage in the event of gross misconduct
- Company with at least 20 employees must offer COBRA
COBRA duration
COBRA lasts:
- 18 months for reduction in hours or normal termination
- 36 months for death, divorce, Medicare eligibility
- 29 months for SS definition of disabled
HSA
Health Savings Account
- LTC, COBRA, Medicare (65+) and premiums paid during unemployment are qualified med expenses
- Must be a part of High Deductible Plan
- Contributions pre-tax, use $ for medical expenses
- Earnings tax-deferred
- Penalty: 20% before age 65 and taxed as ordinary income
- Can be rolled over 1x per year
- Must get prescription for OTC drugs
- Can be used for dental and orthodontics
- not cosmetic surgery
- 60 days for trustee to trustee transfer
- Can be transferred to beneficiary upon death - if not spouse, subject to tax but not penalty
FSA
Flexible Spending Account
- Use it or lose it
- Can be used for “optional” medical expenses
- child/dependent care
Long Term Care Insurance
- Covers broad range of levels of care including custodial care - Assistance with eating, dressing, bathing, etc - which Medicare does not cover
- Benefits can be provided for fixed period of time or for a fixed amount of money
- Premiums tax deductible and benefits may be tax deductible as long as policy is “qualified” and subject to 10% medical cost hurdle (max deductions apply)
Long Term Care Insurance Eligibility for Benefits
Eligibility:
- Substantial cognitive impairment (behavior threatens own/others health and safety
- Unable to perform at least 2 of 6 activities of daily living for at least 90 days:
- Eating
- Bathing
- Dressing
- Transferring from bed to chair
- Using the toilet
- Continence
Homeowners Insurance Perils
- Basic named perils: 12
- Broad perils: 18
- Open perils: all perils covered except for specific exclusions
HO Insurance Exclusions
- Movement of ground
- Ordinance or law
- Damage from water
- War or nuclear hazard
- Power failure
- Intentional act
- Neglect (e.g. termites)
Section 1 Coverages
- A: Dwelling: coverage should be equal to 80% of replacement cost
- Coinsurance - amt. purchased/coinsurance req. x amount of loss
- B: Other structures:
- out buildings
- limit usually 10% of the amount of Coverage A
- Not covered if used for business
- C: Personal Property
- standard coverage is ACV; endorse for replacement value
- jewelry limited to $1500
- D: Loss of use
- combination of add’l living expenses and loss of rental income
- limit is 30% of coverage A
Section II Coverages
- E: Personal Liability:
- Based on a legal liability to pay
- Minimum amt of coverage is 100K
- F: Medical payments to others
- Not based on liability or fault
- Exclusions:
- Injury sustained by insured or family
- Sustained by employee
- Results from nuclear radiation
General Provisions of HO Insurance
- Cannot be assigned to another without written consent
- Subrogation
- Policy void if willful misrepresentation or concealment
HO 3
- Dwelling - open peril basis
- Personal property named peril, covered at 50%
- Can add endorsement for property at open peril
HO 5
Comprehensive Form
- Dwelling - open peril
- Propert - open peril
HO 4
Contents Broad Form (renter) - RENT
- Personal property Broad perils
- loss of use 20% contents
- Coverage for improvements tenant made to property (limited to 10% of property)
HO 6
Unit owners policy - CONDOS
- Broad perils
- coverage for alterations and additions
- loss of use is 40% of personal property amount
- Endorse for Open Perils
- Endorse for loss assessment coverage
HO 8
Historical properties - HISTORIC
- covers repairs rather than replacement
- basic perils
- theft only covered at $1,000
HO insurance duties after loss
- inform insurance company
- protect property from further damage
- inventory of loss
- file written proof of loss
HO 2
- Dwelling and personal property, broad perils
Flood Insurance
- National Flood Insurance Program provides subsidized flood insurance to property owners in qualified areas
- Flood insurance required for those in flood zone
Inland Marine
- Scheduled property
- at agreed upon value
Insurance on watercraft
- ACV (depreciated value)
- covers anything permanently attached to the watercraft
Personal Auto Policy
- Part A: Liability coverage
- Part B: Medical payments
- Part C: Uninsured motorist
- Part D: Damage to Auto
- Part E: Duties after accident
- Part F: General provision
Your covered Auto
- Any vehicle shown in policy declarations
- Must add new vehicle within 30 days
Part A: Liability Coverage
- Covered persons include you, family member, any person using car with permission
- Split limits: Bodily damage per person/Bodily damage per incidents/property damage
- State law minimum increase automatically when crossing states
- Insurance on auto primary; then insurance on person
Part B: Medical Coverage
- Limited on a per person, per occurance basis (usually 5K)
- Provides coverage when struck as pedestrian
- Exclusions: Public livery, racing, and auto used without permissions
Part C: Uninsured Motorist
- pays what an under-insured or uninsured should have paid
- underinsured must be at fault
- cannot sue own insurance company for underpayment
- exclusions: public livery, regular use of nonowned vehicle, auto used without permission, auto used in insureds’ business
Part D: Coverage to Damage to your auto
- Provides direct damage coverage on your covered auto
- Collision: protects accidents involving another car, running off the road, into a tree, etc.
- Comprehensive (also Other-than-collision): falling objects, fire, theft, explosion, earthquake, windstorm, etc. Contact with bird/other animal only covered by comprehensive
- Insurance company can pay for repairs or give cash
- Exclusions: Public livery, regular use of nonowned vehicle, business, most electronic equipment.
Part E: Dutied after an accident or loss
- Notify the insurer
- File a proof of loss
- cooperate with insurer in the investigation
- must file police report if theft or uninsured motorist
Part F: General Provisions
- Only provides coverage in US, Canada, PR but not Mexico
- Notify insurer of new car within 30 days of purchase
Torts
- cover intentional acts or accidents:
- Intentional tort: libel, slander, assault
- Strict and absolute liability
- strict liability: allows for defense
- absolute: no defense (e.g. worker’s comp)
- Negilgence: prudent man standard
- Breach of contract
- Crimes
- Liability insurance does not cover breach or crimes.
Negligence (contributory vs. comparative)
- failure to act as a prudent man
- contributory: if injured persons negligent actions contributed to loss, cannot recover
- comparative: if injured persons negligent actions contributed to loss, can recover a portion of the loss from the other negligent party
Res Ipsa Loquitor
- The act speaks for itself
- plane crash implies negligence
Vicarious liability
- Reponsibility for the acts of others (e.g. bar tenders, parents responsible for children)
PLUP
- Personal Liability Umbrella Policy
- usually provides legal defense for the insured in the event of law suit
- pays the costs up to the face of the policy that result in liability
- requires higher liability limits on underlying auto and homeowners policies (which are exhausted before umbrella)
- includes insured and family
- typical $1-3M
- Exclusions: business, intentional acts, if it occurs on uninsured located owned by insured
Errors and Omissions Insurance
- malpratice insurance for accountants, lawyers, engineers, etc.
FICA
- Federal Insurance Contributions Act
- 6.2% OASDI employee and employer up to 118,500
- 1.45% of total compensation (HI)
- additional Medicare payments for higher income (over 200K single filer, etc)
Qualifying for SS benefits
- Fully insured: paid into system for 40 quarters (1 quarter = $1,220 of earnings up to a max of 4 quarters per year)
- Currently insured:
- 6 quarters of coverage out of the previous 13 quarters
- limited benefits only available to select survivers
- no retirement benefits for currently insured
SS Beneficiaries
- worker
- spouse of worker
- children of worker
- dependent parents
- divorced spouses
Full Retirement age
- full retirement is 65 years if born before 1938
- full retirement is 67 if born in 1960 or after
- increased benefits if retire beyond retirement age
PIA
- Primary Insurance Amount (calculated based o Average Indexed Monthly Earnings)
- Worker receives PIA
- Spouse of retired or disabled worker who is
- 62 years old
- is caring for a child who is under age 16 or disabled
- Divorced spouse of a worker entitled to benefits who is:
- 62 years old
- was married to worker for at least 10 years
- Surviving spouse of a deceased insured worker if the widow(er) is over 60.
Early Retirement (5/9ths, 5/12ths Rule)
Earliest can collect is age 62 but is a permanently reduced benefit:
Calculate number of months early
5/9 of first 36 months (20%) plus /12 of additional months (e.g. if 12, then 5%). PIA is reduced by that amount.
e.g. if retire at age 62 but full retirement is at 66.
That’s 48 months
5/9 * 36= 20
5/12 * 12= 5
subract 25% from PIA
Delayed Retirement
- Increases PIA by 3-8% for each year of delayed retirement (based on normal retirement age)
Retirement Earnings Limitations Test
- reduced SSI if start collecting prior to full retirement if still working. Not a permanent reduction.
- if earn over $15,720 while collecting benefits, SS reduced by 50% over that amount.
- at normal retirement age, 33% reduction in PIA
- after full retirement, no reduction
- earnings do not include pensions, investment income, capital gains
Taxation of Social Security
- up to 85% of benefits may be taxable
Conditional (insurance)
Conditional: In order to keep the insurance policy in force, insured must pay premium
Representation
Principle of utmost good faith - don’t lie
Level Term
Level premium
Decreasing Term Insurance
Decreasing term:
level premiums
DB decreases
Social Security Disability
- Fully insured: 40 quarters, with at least 20 quarters in the last 40 quarters (at age 31 or over- different quarters for younger ages)
- Severe physical and mental impairment that prevents substantial work
- Expected to last at least 12 months or result in death
Social Security Death Benefit
$255 for surviving spouse or minor child (if no spouse)
Social Security Survivors’ Benefits
Subject to maximum family benefit
Widow or widower:
- 60 or older
- over 50 and disabled
- caring for a child under age 16
- caring for a child who was disabled before 22
Unmarried child
- under 18
- under 19 and in high school
- 18 or older if disabled before 22
Dependent parents
Medicare Eligibility
- only 65 or older
- disabled
Medicare Part A
- Hospital insurance
- Premiums for some people - mostly free
- Deductibles per benefit period (time it takes from illness to end of treatment)
- Coinsurance depending on number of days
- Skills nursing facility coinsurance
- NO CUSTODIAL NURSING HOME
Medicare Part B
- Premiums based on income
- covers 80% of:
- doctors
- diagnostics
- outpatient
- medical equipment
- Does not cover:
- teeth, ears, eyes, cosmetic surgery
Medicare Part D
- Monthly premium and percentage of perscription cost
- Donut hole: part of medicare part D where medicare pays nothing
SS Benefits Divorce
- Benefits cease at divorce unless married for 10+ years and individual is 62 or older
- Widow and widower benefits cease at remarriage unless 60 or older
Void vs. Voidable Insurance Contract
- A void contract was never valid
- A voidable contract is allowed to be cancelled by one of the parties.
Parol Evidence Rule
- Written contract supercedes all verbal contracts
Reformation
Contract is revised to express the original intent of all parties
Rescission
Deems a contract void from inception
General Agent
Represents one insurer
Independent Agent
Represents policy owner
Insurance Contract Conditions
Details the duties and rights of insured and insurer
Insurance Contract - Declarations
Identifies the name of the insured, the property, amount of coverage, amount of premium, policy term and inception/termination dates
Insurance Contract Exclusions
Identifies excluded perils (earth movement) or excluded costs (private room, etc) or excluded items (jewelry)
Insurance contract riders/endorsements
- Written additions to insurance contract
- Take precedence over conflicting terms in policy
Insuranc company regulation
- Regulated at the state level.
- Legislative: provides for licensing of agents and enacts laws and requirements
- Judicial: rules on constitutionality of laws passed by legislative branch and render decidsion re: policy terms
- Executive or State Insurance Commissioner: Administers, interprets, and enforces laws - DOES NOT MAKE LAWS.
Goals of State Insurance Regulation
- Protect the insured
- Maintain and promote competition
- Maintain solvency of insurers
Actual Cash Value
- FMV - depreciation (replacement cost for new item less depreciation)
- Almost all auto policies are ACV
Agreed-upon value
- Used to value art and antiques
- Value determined by both insurer and insured.
National Association of Insurance Commissioners
- Provides a watch list of insurance companies based upon ratio financial analysis
- NO regulatory power over insurance industry
- Issues “model regulation” that state legislatures may or may not adopt.
- NAIC works to see that information is adequately communicated as circumstances arise. The organization also sees that recommendations of action serve as the basis for decision-making by setting precedents for states to draw from voluntarily.
- The NAIC also provides recognition though accreditation of state insurance offices.
6 Steps of Risk Management
- Determine the objectives of the risk mgmt program
- Identify the risks to which client is exposed
- Evaluate the indentified risks for probability/loss amount
- Determine alternatives for managing risk
- Implement the program
- Evaluate, monitor and review
Insurance Agent Implied Authority
Based on letterhead, business cards, etc.
Term Life Waiver of Premium
Premium does not have to be paid during periods of disability.
Decreasing Term
- Premiums are level but DB decreases over time
- Most appropriate to pay off mortgage
Current Assumption Whole Life (CAWL)
- Insurer uses new money rates and new mortality tables to establish premium.
- If interest rates are too high and premiums too low, premiums can be adjusted once (usually at 5-year mark)
First-to-Die Policy
- Pays out when first person dies
- Life expectancy is lower than for 2 single-life policies.
Whole Life Dividend Options
- Participating - Pays dividends - CRAP-O
- Cash
- Reduce premiums
- Accumulate interest
- Paid-up additions - purchases add’l insurance regardless of health or occupations
- One-year term - 5th dividend - adds term insurance.
- Non-participating - Does not pay dividends
Whole Life non-forfeiture options
- Cash Surrender Value - Cash value less surrender charges
- Reduced paid-up insurance - Lower death benefit; no additional premiums
- Extended term insurance - Term insurance for a specified amount of time with original death benefit
- (death benefit = face value)
Universal Life A vs. B
- All have flexible premium, adjustable DB.
- A: Total DB is level; Specified insurance amount decreases as cash value increases
- B: Increasing DB as cash vaue increases = specified amount of insurance PLUS cash value.
Variable Universal Life
- Investment option in the plan
- Held in separate account - not treated as asset of the insurance company.
Direct Recognition for LI
- Dividends and interest are reduced by outstanding loans on the policy
Immediate annuity
- Paid with lump-sum and payments being immediately
Deferred Annuity
- Payments begin at a future date.
- Can be a lump sum or periodic payments
Flexible Payments Deferred Annuity (FPDA)
- Premiums are flexible and payments depend on how much was paid
Single Premium Deferred Annuity (SPDA)
- Lump sum payment of premium
- Earnings accumulate tax free until distributed
- Proceeds from a life insurance policy can be used to buy
Fixed Annuity
- Has a fixed interest rate
Variable Annuity
- No guaranteed rate of return - can be invested in stocks, bonds, etc.
- Used to keep pace with inflation.
Pure Life Annuity
- Payments are made during life and stop at death - risk is receiving fewer payments that paid for annuity.
Life Annuity w/Guaranteed min payments
- Payments continue for a specified term and will be paid to bene as long as term is not exceeded during life of annuitant.
Installment Refund Annuity
- If policy payouts are less than total premiums paid, bene will receive payout equal to difference.
Joint and Survivor Annuity
- Payouts over lifetime of 2 annuitants.
- Generally lower payments than pure life.
Pre-1982 Annuity Withdrawal Taxation
FIFO
Post-1982 Annuity Withdrawal Taxation
LIFO
Major Medical Policy - Stop Loss
- Deductible is in addition to stop loss amount
Group Major Medical Policy - Stop Loss
- Stop loss includes deductible
HSA Catch-up
$1000 extra for age 55 and over
Noncancellable Health Policy
- Can’t be canceled by insurer for specified number of years or specific age
- Cannot raise premiums
Guaranteed Renewable Health Insurance Policy
- Insured has right to renew for specified period of time
- Premiums can increase as long as they are increased for entire class of insured’s.
- All policies must be guaranteed renewable
Basic Perils
HO-1
- Windstorm
- Explosion
- Aircraft
- Theft
- Hail
- Riot
- Fire
- Vandalism
- Vehicles
- Volcanos
Broad Perils
HO-2: Basic + Broad
- Sudden bursting of appliances
- Weight of ice/snow/sleet
- Accidental overflow of water
- Damage from electrical current
- Freezing of system or appliance
Open Perils Exclusion
- Movement of ground
- Ordinance or law
- War/Nuclear hazard
- Water - Flood or Sewer
- Power Failure
- Intentional act of the insured
- Neglect
Auto Policy Exclusions
- Motorcycle
- Regular use by relative
- Racing competition
- Company cars
- Cars used primarily for business
Social Security Wage Base
6.2% of up to $118,500
Medicare Tax
- 1.45% on wages up to threshold (250K MFJ)
- .9% after threshold
Late retirement increase
- Up to 8% annually until age 70
SS survivorship benefits always covered
- Child under 18
- Caretaker of child under 16
SS Beneficiaries
- Fully insured worker age 62+
- Disabled insured worker until age 65
- Spouse of retired/disabled worker who is at least 62 OR caring for child under 16.
- Divorced spouse of retired/disabled worker if age 62+, was married for 10 yrs and did not remarry by age 60.
Medicare Part B - Does not cover
- Dental care/dentures
- Cosmetic surgery
- Hearing aids
- Eye exams
Insurance Rating Companies
- AM Best
- Standard and Poors
- Moody’s investor services
Contingent Business Interruption Insurance
If a business insured does not own has an effect on business operations for insured
Modified Any Occupation Definition
the insured is unable to perform the duties pertaining to any gainful occupation for which they are suited by education, experience, or training
Modified no-fault coverage
injured parties do not give up the right to sue, but simply refrain from such action until either a dollar threshold or a verbal threshold are reached.
Surrender of Insurance Policy Taxation
Gain from cash surrender value less basis less dividends is taxed as OI
Business Interruption Insurance
Covers indemnity for businesses during the period where they are rebuilding and restoring after covered losses have forced a halt of business as usual.
Dynamic Risk
the core of risk resides in the change in the environment caused by the changing human condition
Direct recognition
Any amount of cash that is removed from the policy is reflected in a decrease in the amount of dividends and interest paid on that policy
Group Life Coverage
- Generally group size is 10 or more unless specific situations
- Coverage amounts may be (and many times are) based upon salary level, not job classification and length of service.
- Payouts are almost always made in lump sum payment, unless otherwise specifically requested by the beneficiary
Collateral Source Rule
The person who commits the tort will not benefit or be relieved of obligation and responsibility just because the victim has insurance.
Guaranteed Purchase Option
offers a guarantee that the insured canpurchase additional life insurance—without evidence of insurability—when it is most needed, such as at marriage, or the birth or adoption of a child.
Living Benefits Rider
entitles the policyowner to an early (accelerated) payout of policy death benefits,1 if the insured is diagnosed to have a life expectancy of 12 months or less.
Chronically Ill Definition
unable to perform 2 of 6 ADL’s
Homeowner’s bodily injury
Does not cover injury to the insured
