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CFP > Insurance Planning > Flashcards

Insurance Planning Flashcards

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1
Q

Basic Insurance Concepts Risk

A

A condition where there is a possibility of loss (a situation where an exposure to loss exists) -

  • Starting a Business
  • Buying real estate
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2
Q

Basic Insurance Concepts Peril

A

The cause of a possible loss, the event insured against perils like windstorm, fire, and theft.

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3
Q

Basic Insurance Concepts Hazard

A

A condition that may create or increase the chance of loss arising from a given peril like: -

  • Owning a home on an earthquake fault line
  • Owning a home by a river
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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 (for the insurance company)
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5
Q

Methods to Avoid/Reduce Loss

A

Methods Are:

  1. Avoidance: (do not drive, do not purchase property but rent it)
  2. Diversification: duplication of assets or activities at different locations.
  3. Transference: INSURANCE
  4. Retention: voluntary - recognizes that the risk exists and assumes losses (deductible, co-insurance)
  5. Risk reduction: (sprinkler system, safety programs)
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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 Insurance Contract

A

Declarations Page: Factual statements that identify the specific person, property or activity being insured

Definitions: explanation of key policy terms

Insuring agreements: Spells out 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

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8
Q

Negligences

A
  • Attractive nuisances (swimming pool / vacant lot)
  • Negligence per se (violate a statute)
  • Strict liability (product liability)
  • Absolute liability (workers compensation)
  • Vicarious liability - respondent superior (principals responsible for their agents)
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9
Q

Defense

A
  • 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)
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10
Q

Calculating Life Insurance Needs

(two methods)

A
  1. Capital utilization approach: uses annuitization to provide needed income but leaves no money at the end of planned period
  2. 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)
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11
Q

Insurance Rating Service / Category

(most comprehensive service)

A
  • A.M. Best / A++ to F
  • Standard & Poor / AAA to CCC
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12
Q

Sections of Homeowners Policy

A

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

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13
Q

Property Excluded Under

Personal Property Coverage

A
  1. Animals, birds and fish
  2. Motorized land vehicles and aircraft
  3. Property of roomers, boarders and other tenants
  4. Property contained in an apartment regularly rented or held for rental to others by the insured (unless specifically endorsed)
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14
Q

Perils Covered

(Basic Form)

A

The policy lists the perils covered

(WHARVES/FLT)

_W_indstorm, _H_ail, _A_ircraft, _R_iot, _V_andalism, _V_ehicles, _E_xplosion, _S_moke, _F_ire, _L_ightening, _T_heft

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15
Q

Perils Covered

(Broad Form)

A

The policy lists the perils covered

(Basic plus RAF)

_R_upture of a system, _A_rtificially generated electricity, _F_alling objects, _F_reezing of plumbing

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16
Q

Homeowner’s Forms of Coverage

A
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17
Q

Homeowner Polciy Exclusions

A
  • Earthquake
  • Flood
  • Neglect
  • Intentional Loss
  • Ordinance/Law
  • Power Failure
  • War
  • Nuclear Hazard
  • Sink hole is a covered peril for the exam.
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18
Q

Replacement Cost Coverage

A

Replacement cost x Coinsurance percetage = Insurance required

(Insurance Carried)/(Insuracne required) × Loss -Deductible = Amount Paid by Insurance

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19
Q

Automobile Risk Exposures

Requirements for a vehicle to be eligable for:

Insurance Services Office (ISO)

Personal Auto Policy (PAP)

A
  • Be owneed by an individual or by a husband and wife living in the same household
  • Be aprivate passenger automobile
  • Not be used as a public or livery conveyance
  • Not be rented to others
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20
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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21
Q

“Covered Auto” as used

under the policy

A
  • 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 comercial policy)
  • Any tailer you own listed on the declarations page
  • Any auto or trailer you do not own while used as a temporary substitute for any vehice described in this definition which is out of normal use because of a breakdown, repair, servicing, loss or destruction
22
Q

Persons insured under the medical

payments coverage of the PAP

A
  • 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)
23
Q

Uninsured Motorist Coverage

(UM)

A

This agreement promises to pay for amount an injured insured could have collected from the unisured driver if such a driver had carried auto liabilty 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 othe rperson occupying the insured’s covered auto
  • Any person, for damages that person is entitled to recover because of injury to a person decribed above
24
Q

Perils Covered Under the

“Other Than Collision”

Provision of the Auto Policy

A
  • 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
25
Q

Umbrella Liability Insurance

A
  • Nearly always 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 specific minimum amounts
  • Professional acts are specifically EXCLUDED
26
Q

Professional Liability

A

Malpractice: bodily injury (doctors, dentists)

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

27
Q

Workers Compensation

A
  • Unlimited Medical Expenses
  • Disability income (TAX FREE)
  • Death benefits
  • Rehabilitation (medical and vocational)
  • Absolute Liability
28
Q

Medicare

does NOT cover

A
  • Routine footcare, glasses, hearing aids and dental work
  • Emergency care outside the US (except Canada, Mexico, and Caribbean)
29
Q

Medicare - Long Term Care

A
  1. Benefits are limited - paysall of teh first 20 days of skilled care and everything over a specific amount per day for the next 80 days of skilled care(maximum 100 days)
  2. 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 thee days or more
  • The patient’s condition must be expected to improve
30
Q

HMO vs. PPO

A

HMO:

  • Provider paid for actual service rendered
  • Out-of-network care not covered at all

PPO:

  • Provider paid for actual services rendered
  • Out-of-network partially covered (usually 70%)
31
Q

COBRA Coverage Requirements

A
32
Q

Health Savings Account

HSA

A
  • Used in conjunction with High Deductible Health Plan(HDHP)
  • Distributions tax-free if used for healthcare
  • Contributions not spent are carried forward in the owners name and are portable
  • Unused assets become propertyof named beneficiary upon death
  • Distributions for non-medical are ordincary income taxable plus 20% penalty if under 65
33
Q

Definitions of Disability

A
  1. Own occumpation - best definition for insured
  2. Modified any occupation
  3. Split definition - own then modified
  4. Any occupation (social security definition)
  5. Loss of Income
34
Q

Disability Income

Policy Continuance Provisions

A

Noncancellable “noncan”: continuous term policy guaranteeing the insured’s right to maintain the policy at the stated premium

Guarenteed renewable: continuous right to maintain the policy, but the insurer may increase the premium by class of insureds

35
Q

Taxation of Disability Policies

A

Taxation of premiums and benefits

The individual owns the contract and pays teh premium.

  • Permiums 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
36
Q

Permanent Life Insurance -

Low risk tolerance

A
  • Insurance comapny controls investment return
  • Assets part of general account
  1. Whole Life
  2. Universal Life
37
Q

Permanent Life Insurance -

High risk tolerance

A
  • Client Controls investment return
  • Assets part of separate Aaccount
  1. Variable Life
  2. Variable Universal Life
38
Q

Dividend Options

A
  • Cash
  • Reduce premium
  • Accumulate with interest
  • Paid-up additions
  • One-year term / 5th dividend
39
Q

Nonforfeiture Options

A
  • Cash
  • Extended term
  • Paid Up Reduced Amount
40
Q

Settlment Options

A
  • Cash
  • Pure life / single life
  • Refund
  • Period certain
  • Specific income/period
  • Interest only
41
Q

Modified Endowment Contract

MEC

A
  • Enetered 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 59 1/2 also subject to 10% penalty tax (of not disabled)
  • Death benefit is tax-free
42
Q

“MEC” Grandfather

Life Insurance Rules

A
  • If the death benefit increases by $150k or less and the insured had guarenteed 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.
43
Q

Proceeds 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 excess of the cinsideration 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 of transfer to the insured
  • A sale or trabnsfer to a partner or partnership in which the insured is a partner
  • A corporation in whihc the insured is a shareholder or officer
  • Divorce
44
Q

1035 Tax Free Exchange Rules

A

Life → Life (OK)

Life → Annuity (OK)

Annuity → Annuity (OK)

Annuity → Life (NO NO NO)

45
Q

Buy Sell

Stock Redemption

vs.

Cross Purchase

A

Stock Redemption: No step-up in cost basis

Cross-Purchase: Step-up in basis

46
Q

Split-Dollar Insurance

EndoRsement Method

vs.

Collateral aSSignment Method

A

EndoRsement Method:

  • EmployeR is the owneR
  • Employee is not a shareholder

Collateral aS Signment method:

  • Employee is owner
  • Employee is a Shareholder
  • Employee aSSigns the policy
47
Q

Annuity Taxation

A

Periodic Payouts Basis/Payout = Tax-Free

Lump Sum payouts

LIFO (interest first rule)

Ordinary income plus 10% penalty under 59 1/2

48
Q

Flexibilty Spending Account

FSA

A
  • Must be used by March 15th or forfeited to company (use it or LOSE it - Medical Only. Dependent Care must be used by 12/31)
  • 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
49
Q

Fringe Benefits Tax-Free

major ones

A
  • Health care premiums
  • Insurance premiums on non-discriminatorygroup life policy up to $50,000
  • Company car for working conditions only
  • Employer-provided transit passes ($135 / month cap) or parking ($255 / month cap)
  • Occasional overtime meal money, cab fare, theater or sporting event tickets
  • Discount on service limited to 20% of selling price charged customers
50
Q

Fringe Benefits Taxable

A

Health insurance prmiums 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.

CFP (6 decks)

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