Insurance Planning Flashcards
1
Q
Definitions of Disability
A
- Own Occupation (best for insured)
- Modified any occupation
- Split definition (own then occupied)
- Any occupation (social security definition)
- Loss of income
2
Q
Disability Income policy continuance provisions
A
- Noncancellable “noncan”: continuous term policy guirunteeing insured’s right to maintain the policy at the stated premium
- Guarunteed renewable: continuous right to maintain the policy, but the insurer may increase the premium by class of insureds
3
Q
Taxation of disability policy (Individual owns and pays)
A
- Premiums not deductible
- benefits are tax-free to the EE
4
Q
Taxation of disability policy (ER pays entire premium under bonus arrangement such as section 162)
A
- Premiums are deductible by ER as a bonus
- Benefits tax-free to EE
5
Q
Taxation of disability policy (ER pays entire premium under salary continuation plan - group plan)
A
- Premiums deductible by the ER
- Benefits taxable to EE
6
Q
Permanent Life Insurance - Low risk tolerance
A
- Insurance company controls investment return
- Assets part of general account
- Whole Life
- Universal Life
7
Q
Permanent Life Insurance - High risk tolerance
A
- Client “controls” investment return
- Assets part of separate account
- Variable life
- Variable Universal Life
8
Q
Dividend Options (HINT: CRAPO)
A
- Cash
- Reduced premium
- Accumulate w/ interest
- Paid-up additions
- One-year term / 5th dividend
9
Q
Nonforfeiture Options
A
- Cash
- Extended Term
- Paid-up reduced amount
10
Q
Settlement Options
A
- Cash
- Pure life/single life
- Refund
- Period Certain
- Specified income/period
- Interest only
11
Q
Modified Endowment Contract (MEC)
A
- Entered into after June 21, 1988
- Fails to meet “seven pay test”
- Distributions/withdrawals taxed LIFO (interest first)
- Distributions pre 59.5 subject to 10% fed tax penalty if not disabled
- Tax-free death benefit
12
Q
Grandfathered MEC Life Insurance rules
A
- If DB increases by $150k or less and insured has guaranteed insurability, policy will NOT los it’s grandfathered (non-MEC) status
- If policy increases by any amount and the insured must prove insurability, policy MAY lose grandfathered (non-MEC) status.
13
Q
Proceeds taxable due to transfer for value
A
- If interest in LI policy is transferred for valuable consideration, proceeds in excess of consideration paid, combined with any premiums paid by the owner, are taxable as ordinary income.
14
Q
Proceeds taxable due to transfer for value EXCEPTIONS
A
- Sale or transfer to the insured
- Sale or transfer to a partner or partnership where the insured is a partner
- A corporation in which the insured is a Shareholder or officer
- Divorce
15
Q
1035 Tax Free Exchange rules
A
Yes:
- Life –> Life
- Life –> Annuity
- Annuity –> Annuity
NO:
1. Annuity –> Life
16
Q
Buy/Sell – stock redemption vs stock purchase
A
Stock Redemption: no step-up in cost basis
Cross-Purchase: Step-up in basis
17
Q
Split-Dollar Insurance– EndoRsement Method vs. Colleteral aSSignment Method
A
EndoRsement Method:
- ER is owneR
- EE not a shareholdeR
Collateral aSSignment Method:
- EE is owner
- EE is a shareholder
- EE aSSignes the policy
18
Q
Annuity Taxation
A
Periodic Payments:
Basis/Payout = Tax-free
Lump Sum:
- LIFO
- Ordinary income plus 10% tax penalty pre 59.5
19
Q
Flexible Spending Arrangement (FSA)
A
- EE’s contribution is an elected salary reduction and not subject to income taxes, FUTA or FICA
- ER may contribute (taxable as income only if used if ER makes contributions to pay for coverage for LTC)
- No reporting requirements on tax return
- Not eligible to self-employed persons
- Can’t be used to reimburse EE for health insurance premiums, LTCI (premiums or expenses), amounts covered under another health plan (such as HSA, MSA)
20
Q
Major tax-free fringe benefits
A
- Health insurance premiums
- Insurance premiums on non-discriminatory group life up to $50k
- Company car for working conditions only
- ER-provided transit passes or parking ($270/moth cap each)
- Occasional overtime meal money
- Cab fair
- Theater or sporting event tickets
- Discounts on services limited to 20%
21
Q
Taxable fringe benefits
A
- Health insurance premiums paid for SE, partners, >2% owners of S corp are taxable income; however, 100% is deductible as adjustment on 1040.
22
Q
Basic insurance concept - RISK
A
A condition where there is a possibility of loss (exposure to loss exists)
Examples:
- Starting a business
- Buying real estate
23
Q
Basic insurance concept - PERIL
A
The cause of a possible loss – the event insured against.
Examples:
- Windstorm
- Fire
- Theft
24
Q
Basic insurance concept - HAZARD
A
A condition that may create or increase the chance of loss arising from a given peril.
Examples:
- Owning a home on an earthquake fault line
- Owning a home by a river
25
Elements of Insurance
- Large number of homogeneous exposure units
- Loss must be definite and measurable
- Must be fortuitous or accidental
- Must not be catastrophic (for insurance company)
26
Methods to avoid/reduce loss
1. Avoidance
2. Diversification
3. Transference (this is INSURANCE.....)
4. Retention (recognize risk exists and assume losses...Deductible, co-insurance)
5. Risk reduction (ex: install sprinkler system)
27
Insurable interest
Property/Casualty: At inception and at time of claim
Life: At inception but not at time of claim
28
What is the Declarations section of an insurance policy?
Provides factual statements that identify the specific person, property or activity being insured
29
What is the Definitions section of an insurance policy?
Explanation of key policy terms
30
What is the insuring agreements section of an insurance policy?
Spells out the basic promise of the insurance company
31
What is the conditions section of an insurance policy?
Spells out in detail the duties and rights of both parties
32
What is the exclusions section of an insurance policy?
Circumstances when the insurer won't pay
33
What are the sections/parts of an insurance contract? (DDICE)
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Declarations page
Definitions
Insuring agreements
Conditions
Exclusions
```
34
Negligences
- 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)
35
Defenses
- Assumption of risk (skiing, racing)
- Contributory (jay walking, being intoxicated)
- Comparative (A is 20% negligent, B is 80%)
- Last clear chance (road rage)
36
What are two methods of calculating life insurance needs?
Capital Utilization approach: uses annuitization to provide needed income but leaves NO money at the end of the period
Capital Needs approach: Uses interest only -- original capital remaining at end of income period (also called capital retention or interest only)
37
What is the Capital Utilization approach?
Uses annuitization to provide needed income but leaves NO money at the end of the period
38
What is the Capital Needs/Capital Retention/Interest Only approach?
Uses interest only -- original capital remaining at end of income period (also called capital retention or interest only)
39
Insurance Rating Service/Category
A.M. Best: A++ to F
Standard and Poor: AAA to CCC
40
Sections of a Homeowner Policy - Section I
Section A: dwelling and attached structures
Section B: structures separated from dwelling
Section C: Contents and personal property
Section D: Loss of use
41
Sections of a Homeowner Policy - Section II
Section E: liability
| Section F: medical payments
42
Property excluded under personal property coverage
1. Animals
2. Motorized land vehicles or aircraft
3. Property of roomers, boarders and other tenants
4. Property contained in an apartment regularly rented or held to others by the insured (unless specifically endorsed)
43
HO Policy Perils covered (basic form, HO-1)
- Windstorm
- Hailstorm
- Aircraft
- Riot
- Vandalism
- Vehicles
- Explosion
- Smoke
- Fire
- Lightning
- Theft
44
HO Policy Perils covered (broad form, HO-2)
- Rupture of a system
- Artificially generated electricity
- Falling objects
- Freezing of plumbing
45
What is an HO-1 policy?
Basic coverage homeowners policy. If peril is not explicitly listed, its not covered.
Dwelling (A): Basic
Other Structures (B): Basic
Contents & Personal Property (C): Basic
Loss of use: (D): Basic
46
What is an HO-2 policy?
Broad form homeowners policy. Covers perils covered under HO-1 (basic) plus additional perils such as rupture of a system, falling objects, etc.
Dwelling (A): Broad
Other Structures (B): Broad
Contents & Personal Property (C): Broad
Loss of use: (D): Broad
47
What is an HO-3 policy?
(mostly) Open peril homeowners policy.
Dwelling (A): Open
Other Structures (B): Open
Contents & Personal Property (C): Broad
Loss of use: (D): Open
48
What do HO-15 endorsements do?
Homeowners insurance coverage endorsement which changes contents & personal property to open peril. HO-3 with HO-15 is the same as HO-5.
Dwelling (A): Open
Other Structures (B): Open
Contents & Personal Property (C): Open
Loss of use: (D): Open
49
What is an HO-8 Policy?
Homeowners insurance for older buildings where replacement cost potentially outweigh the market value.
Dwelling (A): Basic
Other Structures (B): Basic
Contents & Personal Property (C): Basic
Loss of use: (D): Basic
50
What is an HO-4 Policy?
Renters insurance.
Dwelling (A): N/A
Other Structures (B): N/A
Contents & Personal Property (C): Broad
Loss of use: (D): Broad
51
What is an HO-6 Policy?
Condo insurance.
Dwelling (A): N/A
Other Structures (B): N/A
Contents & Personal Property (C): Open
Loss of use: (D): Broad
52
Homeowners policy exclusions
- Earthquake
- Flood
- Neglect
- Intentional Loss
- Ordinance/Law
- Power failure
- War
- Nuclear Hazard
- Sink hole **COVERED PERIL ON EXAM**
53
Replacement cost coverage Equation
Replacement cost X Coinsurance percentage = insurance requirement
(Insurance carried/Insurance required) X Loss - Deductible = Amount paid by insurance
54
Automobile risk exposures
- Be owned by individual or by husband and wife living in the same household
- Be a private messenger automobile
- Not be used as a public or livery conveyance
- Not be rented to others
55
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
56
What is Part A of an auto insurance policy?
Part A: Limited to third parties
57
What is Part B of an auto insurance policy?
Part B: Medical payments
58
What is Part C of an auto insurance policy?
Part C: Uninsured/underinsured motorists
59
What is Part D of an auto insurance policy?
Part D: Damage to the covered auto
60
What is a "Covered Auto" as used under an auto policy?
- Any vehicle on declarations page
- Private passenger auto, pickup truck, panel truck or van acquired during the policy period.
- NO coverage for above if used in a business (need commercial policy)
- Any trailer owned and listed on declarations page
- Any auto or trailer not owned but used as a temporary substitute due to breakdown, repair, service, loss, destruction.
61
Persons insured under medical payments coverage of PAP
- The named insured and any family member who suffered bodily injury caused by an accident while occupying the covered auto.
- The named insured and family members who are struck as a pedestrian by a motor vehicle or trailer designed for public roads.
- Other persons while occupant of the insured's auto (passengers)
62
Uninsured Motorist Coverage (UM)
**Liability protection, NOT medical payments**
Promises to pay amount injured insured could have collected from the uninsured driver if they carried auto liability insurance.
63
Who is considered "covered person" under uninsured motorist coverage of PAP?
- 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.
64
Perils covered under "Other than collision" provision of PAP
- Breaking 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
65
Umbrella liability insurance
- Nearly always a correct answer, since it's 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
66
Professional Liability
Malpractice: bodily injury (doctors, dentists)
E&O: Monetary damages (financial advisor, lawyer, accountants, insurance agents)
67
Workers compensation
- Unlimited Medical Expenses
- Disability income (TAX FREE)
- Death benefits
- Rehabilitation
- Absolute Liability
68
Medicare does not cover
- Routine foot care
- Glasses
- Hearing Aids
- Dental
- Emergency care outside US (some exceptions for Canada, Mexico, Caribbean)
69
Long-Term Care (Medicare)
1. Limited benefits. First 20 days of skilled care and everything over specified amount per day for next 80 days of skilled care (max 100 days)
2. Substantial restrictions:
- Pays for skilled care only
- Admission to a nursing home must follow within 30 days of a hospital stay of 3+ days
- Patient's condition must be expected to improve
70
HMO vs PPO
HMO:
- Provider paid monthly fee regardless of services rendered (capitation)
- Out-of-network care not covered
PPO:
- Provider paid for actual services rendered
- Out-of-network partially covered (usually 70%)
71
COBRA number of EE coverage requirement
Must have 20 FT/PT EE's
72
Who must coverage be offered to under COBRA and for how long?
- Terminated EE and dependents: up to 18 months
- Death, divorce, legal separation, eligibility for medicare: up to 36 months
- Loss of dependent status (marriage) or reaching dependency age limit specified
73
What is the continuation period for a terminated EE under COBRA if the qualifying event was termination (voluntary or not) or changing from FT to PT?
Up to 18 months for EE and dependents
74
What is the continuation period for a terminated EE under COBRA if the qualifying event was EE's death, divorce, legal separation, eligibility for Medicare?
Up to 36 months for spouses and other dependents
75
What is the continuation period for a terminated EE under COBRA if the qualifying event was loss of dependency status (marriage) or reaching dependency age limit specified by the plan?
up to 36 months for children of EE
76
Health Savings Account (HSA)
- Used in conjunction w/ HDHP
- Distributions tax-free if used for qualified health expenses
- Contributions not spent are carried forward in owner's name are are portable
- Unused assets become property of named beneficiary upon death
- Distributions for non-medical are ordinary income plus 20% penalty if under 65
