insurance (review) Flashcards
express authority
written in the contract
implied authority
are actions assumed to be part of an agent’s repertoire within his or her rights (authority to write a policy)
apparent authority
when a 3rd party believes there is authority (signage, business cards)
What is the main responsibility of the underwriting department of a life insurance company?
To guard against adverse selection.
To set a limit on the amount of insurance issued.
To set adequate insurance rates.
To avoid exposures that could result in loss.
Solution: The correct answer is A.
The limit on the amount of insurance (Option “B”) is determined by company policy. Adequate insurance rates (Option “C”) is set by the state. In regard to Option “D”, it is the nature of insurance to cover losses.
Which of the following life insurance transactions would result in the death benefit being subject to income tax under the transfer-for-value rule?
A. Kerri’s irrevocable life insurance trust purchases a new universal life policy with Kerri as the insured and her grandchildren as beneficiaries.
B. Danny sells an existing $300,000 whole life insurance policy on his life to his former business partner for $60,000. The policy had a gift tax value of $45,000 at the time of the sale.
C. Ross buys an 8-year-old $700,000 policy on his life from Mike, his brother-in-law and former business associate, in return for its $110,000 gift tax value. Ross names his wife Anne as beneficiary of the policy.
D. Kate sells her son a $100,000 policy on her life for $1,000. At the time of the sale, the policy had a gift tax value of $4,000 and the mother had paid net premiums of $5,000.
Solution: The correct answer is B.
A is incorrect. Since the ILIT purchased a new insurance policy, this does not represent a transfer-for value. C is incorrect. The transfer of a policy to the insured represents an exception to the transfer for value rule. Therefore, the proceeds will remain income-tax free to Anne. D is incorrect. This represents a “part gift part sale.” There has been a gift of $3,000 ($4,000 value of the policy less $1,000 paid by the son), and a sale for $1,000 of a policy worth $4,000. In this example, the transaction will be within the “carryover basis” exception of the transfer-for-value rule, because Kate’s $5,000 basis was greater than the $1,000 she received (so there was no gain or adjustment to her basis by the son), and the gift value is greater than the consideration. Where the transferor’s basis is GREATER than the consideration received, the transferee carries over the transferor’s basis. Here, the son’s basis (for purposes of determining gain or loss on subsequent policy transactions) will be the basis he can carry over from that of his mother’s, i.e., $5,000. So, in spite of the valuable consideration paid by the son, he will receive the proceeds income-tax free.
If a permanent life policy provides a guaranteed option to purchase additional insurance on the original policy, that option will include all of the following features in the new policy, except:
Guaranteed purchase option.
Disability waiver of premium.
Accidental death benefit.
Non-forfeiture provisions.
Solution: The correct answer is A.
Guaranteed purchase options cannot be purchased with guaranteed purchase option provisions. It would be like making the third wish for three more wishes.
The ‘principle of indemnity’ refers to which of the following:
The right of a party to collect from third parties who are responsible for having caused the loss.
The right of the insured to be made whole after a loss occurs.
The right of the insured to bring tort action against the tortfeasor.
The stake or interest in a matter, person, property, or other business concern that might be damaged if the peril insured against occurs.
Solution: The correct answer is B.
Option “A” is vicarious liability. Option “C” is the right to bring suit. Option “D” is an insurable interest.
Homeowner policy exclusions
animals, birds & fish + motor vehicles + aircraft +property of roomers & boarders + property in rented apartment
Look for rent related questions (no coverage)
Client’s home burns down. He has $35,000 of contents insurance but $3,000 is stored in a locked closet in the rental apartment. Content coverage $35K=$3K = $3,200
If renter had $1,500 of contents= no coverage either= excluded
parts of a (variable) insurance contract
Unilateral contract; it was drafted by one party.
Aleatory contract; means the policy values are uneven. The insured pays a small premium for a larger death benefit from the insurance company.
Conditional contract; conditions must be met to establish the policy (underwriting, health screening etc) and keep the policy (pay premiums).
Personal contract of adhesion; It is not a business contract, it is a policy on one person, making it a personal contract.
Which of the following is an advantage when a business chooses to have self-insurance for its employees?
Necessity to replace impartial claims service.
Incurred losses are deductible to the company.
Contributions to the self-insurance fund are not tax deductible.
Investment management and consulting services are replaced by the self-insurer.
Solution: The correct answer is B.
All the statements are true, but Options “A,” “C” and “D” are disadvantages or at the very least, additional requirements placed on the self-insurer.
Which of the following would have the least risk exposure?
A. Maintaining the HO policy liability at $100,000 without an umbrella policy.
B. Maintaining a long-term care with a two-year benefit period.
C. Not having a long-term care policy.
D. Having $60,000 Part A coverage on a home with a replacement cost of $100,000.
Solution: The correct answer is D.
Having $60,000 Part A coverage on a home with a replacement cost of $100,000.
This would have the LEAST risk exposure.
A – leaves unlimited liability.
B – two years in a nursing home out of pocket could be 192,000 – 240,000
C – Average stay in a nursing home is 3 years. Average cost 8k-10k a month. Could cost 360,000 for a 3 year stay.
D is the difference in what you should have, 80% of 100k and what he does have, which is a 20,000 difference.
Instructor note:
The question is asking where you would have the least risk exposure so if you go through each of the questions AB&C would leave you on the hook for a lot of risk if things were to go badly an it be they are not referring to waiting period they are referring to the benefit period. You could go into a nursing home for 10 years and if you only have a payout for two years you have a lot of risk.
Answer D is the one that would give you the least amount of risk financially for the ones that were provided.
Which of the following definitions of disability used in a group disability income plan is the most restrictive to the employee?
A. The inability of the employee to perform each and every duty of his or her own occupation.
B. The inability of the employee to engage in any occupation for compensation.
C. The inability of the employee to engage in any occupation for which he or she is qualified by training, education, or experience.
D. The inability of the employee to engage in his or her own occupation for 24 months and any occupation for which he or she is qualified thereafter.
Solution: The correct answer is B.
The most restrictive definition of disability is “the inability of an employee to engage in any occupation for compensation.”
A is incorrect. “The inability of the employee to perform each and every duty of his or her own occupation” is the most liberal definition for the employee, since the inability to perform one major duty would constitute a disability. C is incorrect. “The inability of the employee to engage in any occupation for which he or she is qualified by training, education, or experience” is more liberal for the employee than “the inability of an employee to engage in any occupation for compensation.” D is incorrect. A split definition of disability is more attractive to an employee than “the inability of an employee to engage in any occupation for compensation.”
In the Commercial General Liability contract, which of the following parts does not belong?
Coverage A, bodily injury and property damage liability.
Coverage B, personal and advertising liability.
Coverage C, medical payments.
Coverage D, other structures.
Solution: The correct answer is D.
There is no “other structures” coverage on a CGL contract.
Two fairly common defenses used against charges of negligence have been contributory negligence and:
Lack of injury.
Combined negligence.
Assumption of risk.
Lack of negligence.
Solution: The correct answer is C.
Today, more and more we are seeing cases presented on a comparative negligence basis. This allows one to collect even if one party did in some way contribute to the accident.
Ron asks a CFP® professional, Tara, to help him analyze his disability insurance need. Ron is age 35 and in good health. Which of the following represents the least important information for Tara to obtain to assist Ron with the analysis?
A. Ron’s existing disability coverage.
B. Ron’s existing emergency fund.
C. Ron’s existing medical insurance coverage.
D. Ron’s current income level.
Solution: The correct answer is C.
Disability insurance sufficiency analysis requires consideration of multiple factors. These factors include financial needs, existing coverage, and current levels of income. Health insurance coverage is the least relevant coverage in performing a disability insurance sufficiency analysis
