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Certifications > Insurance & Social Security > Flashcards

Insurance & Social Security Flashcards

1
Q

Risk, for insurance purposes, is defined as:

A

loss or no loss

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2
Q

Pure Risk

A

insurable

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3
Q

Speculation

A

gain or loss (investment)

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4
Q

Fundamental Risk

A

impersonal group risk (recession)

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5
Q

Particular Risk

A

personal (your disability)

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6
Q

Static Risk

A

caused by other than changes in the economy (earthquake)

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7
Q

Dynamic Risk

A

caused by changes in the economy

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8
Q

Peril

A

cause of a financial loss (fire, theft, collision, hurricane)

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9
Q

Hazard

A

a condition that increases the likelihood that a peril will occur

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10
Q

Physical Hazard

A

storing gasoline too close to an open flame (may cause a fire)

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11
Q

Moral Hazard

A

dishonesty

an insured files a fraudulent claim

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12
Q

Morale Hazard

A

carelessness

insured does NOT take proper precautions to protect an asset because they have insurance

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13
Q

Risk Management

A

Low Frequency Low Severity = retain

Low Frequency High Severity = Insure transfer

High Frequency Low Severity = reduce

High Frequency High Severity = avoid

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14
Q

Underwriter’s Challenge

A

manage adverse selection

underwriter manages adverse selection of the insurance portfolio by using techniques on the front end (physicals for life insurance, history of claims for property insurance, etc.) & on the back end (raising premiums, canceling insured w/ excessive claims, etc.)

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15
Q

Insurable Risk (CHAD)

A

for a risk to be insurable, the following must be true: CHAD

  1. Not Catastrophic to insurer
  2. Homogeneous exposure units (large # of similar units)
  3. Accidental as to insured
  4. Determinable & Measurable risks
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16
Q

Social Insurance

A

mandatory in nature

examples = Social Security & worker’s compensation

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17
Q

Public Insurance

A

mandatory in nature

examples include FDIC, SIPC, & PBGC

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18
Q

Private Insurance

A

voluntary in nature

examples include insurance on the person, property, or liability

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19
Q

Legal Nature of Insurance

A

Areas of law = torts, contracts, agency

insurance is a contract & therefor can say anything

there is NO substitute for reading the contract, especially regarding coverage, limits, & exclusions

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20
Q

Contract Law

A

offer, acceptance, consideration, legal object, competent parties, & legal form

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21
Q

Principle of Indemnity

A

cannot make a profit

to make whole

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22
Q

Insurable interest

A

life insurance = only at inception

property = at inception & at time of loss

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23
Q

Contract is personal

A

cannot be transferred or assigned w/out the consent of the insurer w/ the exception of life insurance

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24
Q

Contract of Adhesion

A

ambiguities are charged to the writer/insurer

take it or leave it contract, no negotiating

approved as is for sale in state by state insurance commissioner

statements by the insured are representations NOT warranties & must be material to void contract

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25
Q

Contract is Aleatory

A

parties may not give & receive equal dollar amounts

insured pays premiums & has no claims or DB paid out greater than premiums paid

the outcome is affected by chance

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26
Q

Contract is Unilateral

A

one promise only & made by the insurer & conditional

conditioned on the insured paying premiums

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27
Q

Tort Law

A

typically insurance covers for negligent & not intentional acts caused by the insured

children/minors may be held liable/parents may be vicariously liable for acts of children

damages may be compensatory; if the injury is a bodily injury it is NOT taxable

punitive & compensatory damages w/out bodily injury are subject to income taxation

Defenses include - assumption of the risk, contributory negligence, comparative negligence, & last clear chance

statute of limitations for tort decisions may be up to 2 years (up to 3 years for property damage

recommended to have a PLUP which covers the risk & also provides legal defense

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28
Q

Comparative Negligence

A

if both the plaintiff (injured party) & the defendant contribute to the circumstances that result in injury, then the damages are adjusted to reflect their respective percentage of fault

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29
Q

Contributory Negligence

A

if the injured party contributes in any way to the circumstances that result in injury, then the injured party cannot collect any damages

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30
Q

Agency Law

A

an agency & agent binds the principal if in course & scope of agency

may result from express, implied, or apparent authority

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31
Q

Insurance Regulations & Ratings

A

regulation by the State Insurance Commissioner

NAIC (National Association of Insurance Commissioners) policy group

A.M. best (A++-S

Moody’s (Aaa-B3)

S&P (AAA-B)

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32
Q

Life Insurance

A

mitigates against risk of loss of income for those w/ dependents

parties are owner, insured, & beneficiary

incontestability clause - 2 years

suicide clause - 2 years

grace period - 31 days

war clause

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33
Q

Life Premiums

A

based on in-house mortality tables plus interest & loading

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34
Q

Term Insurance

A

pure insurance for specified period covered

premiums level or increase

no cash value

inexpensive, usually renewable, can be converted to permanent insurance

good choice for most families & those w/ temporary insurance needs; large need limited resources

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35
Q

Whole or Ordinary Life Insurance

A

fixed premium

fixed DB

no owner control over investments

fixed ROR

want guarantees

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36
Q

Variable Life Insurance

A

fixed premium

guaranteed minimum DB but can increase if investment experience on CV is good

policyowner control over investments

no minimum CV guarantee

flexibility w/ investment responsibility, fixed premiums

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37
Q

Universal Life Insurance

A

variable premiums subject to required minimum

DB may increase above initial face amount depending on CV accumulation

no policyowner control over investments

may have minimum guaranteed CV rate but can be higher depending on interest rates

premium flexibility w/out investment responsibility

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38
Q

Variable Universal Life Insurance

A

variable premium subject to required minimum

guaranteed minimum DB but can increase if investment experience on CV is good

policyowner complete control over investments

no minimum guarantee CV ROR

flexibility w/ investment responsibility, variable premiums

agent needs both insurance & securities license to sell

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39
Q

High/Low CAWL (Current Assumption Whole Life)

A

interest sensitive crediting

Low CAWL = low premiums

High CAWL = higher premiums

insurer right to adjust premium at 5 year mark

cash value invested in insurer’s bond portfolio

agent only needs insurance license to sell

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40
Q

Second to Die

A

typically used for estate planning

DB paid after second death (survivorship)

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41
Q

First to Die

A

typically usually used to pay off mortgages

DB paid after first death (joint life insurance?)

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42
Q

Credit Life

A

protects the lender, usually very expensive (better off w/ term insurance)

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43
Q

Needs Approach

A

amount of life insurance needed

PV of dependent needs, including last medical, funeral, adjustment period, mortgage payment fund, dependency cost of living, education fund, & retirement fund

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44
Q

Human Life Approach

A

amount of life insurance needed

PV of income expected less taxes & decedent consumption

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45
Q

Capitalized Income Approach

A

amount of life insurance needed

decedent’s income (less taxes & consumption) divided by the inflation-adjusted investment rate

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46
Q

Death Benefit Taxation

A

generally not taxable to recipient EXCEPT for transfer-for-value rule or a cash value policy held by a QP

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47
Q

Transfer-for-Value Rule

A

when policy transferred for valuable consideration DB may not be fully excluded from income taxation

EXCEPTIONS: (i.e. DB NOT taxed)
1. transfer to the insured
2. transfer to business partner of the insured (or to the partnership)
3. transfer to a corporation in which the insured is an officer or shareholder
4. transfer to a transferee whose basis is determined by the transferor’s basis (or tax-free exchange or gift)

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48
Q

Surrender of Policy Taxation

A

taxable to extent surrender value exceeds premiums paid

EXCEPTION: viatical settlement or accelerated benefits provision/nontaxable if insured expected to die w/in 2 years or chronically ill

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49
Q

Life Insurance Dividend Taxation

A

not taxable unless received as cash & exceed premiums paid

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50
Q

Life Insurance Loans Taxation

A

taxable if MEC & then only to extent earnings are withdrawn as loans (LIFO)

51
Q

MEC Taxation

A

all single premium insurance policies are MEC’s

does not affect taxation of DB

cash withdrawals (including loans) treated on LIFO basis (return on investment) & are taxable (taxable portion also subject to 10% penalty if insured is under 59.5

once a MEC always a MEC

a policy exchanged for a MEC is also a MEC

52
Q

Life Insurance Premiums Taxation

A

NOT tax deductible for personal or business insurance

EXCEPT group-term insurance

53
Q

Cash

A

dividend option

clients receive money & can use it or invest it as they wish

54
Q

Accumulate at Interest

A

dividend option

company invests the dividends & tax-free up to the client’s basis in the policy

interest paid on the dividends is taxable

55
Q

Reduce Premiums

A

dividend option

decreases the out of pocket expense for premiums

56
Q

Paid-up Additions

A

dividend option

purchases additional insurance each year for insured regardless of health or occupation

57
Q

One-year Term

A

dividend option

adds term insurance each year to the policy face amount equal to cash value of the policy

also known as the 5th dividend option on the CFP certification examination

58
Q

Cash Surrender Value

A

nonforfeiture option

insured receives the accumulated cash value

cash surrender value = CV minus surrender charges

59
Q

Reduced Paid-up Insurance

A

nonforfeiture option

insured receives the cash value in the form of a paid-up policy w/ a smaller face amount

60
Q

Extended Term Insurance

A

nonforfeiture option

insured receives the CV in the form of a paid-up term policy for a specified duration, w/ the same face amount as the original policy

61
Q

Long Term Disability

A

covers the loss of income d/t disability

62
Q

DI Coverage

A

typically cover periods when the insured is unable to work d/t suffering an accident or sickness

63
Q

DI Amount of Benefits

A

60-70% of gross pay

64
Q

DI Period of Benefits

A

needs to be to retirement or life

65
Q

DI Types of Policies

A

own occupation, any occupation, split definition (own occ to any occ)

NOTE: Social Security definition disabled for 5 months, expected to continue for 12 months or result in death & cannot perform duties of any occupation

may be integrated w/ Social Security to reduce premiums in group plans

benefits taxable if premiums paid by other than insured

usually 30-180 day elimination period (longer EP = lower premiums)

may have residual clause = provides some benefits for returning to work in a lower paid position

needs to be either non-cancellable (insurer cannot cancel nor raise premiums) or guaranteed renewable (insurer cannot cancel but CAN raise premiums but only if raised on entire group)

66
Q

Short Term Disability

A

covers up to 2 years of benefits (usually group)

67
Q

Long-Term Care LTC - Private Policies

A

Medicare does NOT provide for LTC

LTC policies must be either non-cancellable or guaranteed renewable

Eligibility = cannot perform 2 of 6 ADLs (eating, bathing, dressing, transferring, toileting, or continence) for at least 90 days OR substantial cognitive impairment

small federal income tax deduction for premiums paid

68
Q

Business Property & Liability Insurance (5)

A
  1. BAP - Business auto policy similar to PAP
  2. CPP (commercial package policy) - property & liability similar to homeowners insurance
  3. Workman’s Comp - mandatory for employers
  4. CLUP - Commercial liability umbrella policy (similar to PLUP)
  5. Professional Liability Insurance - malpractice insurance (covers negligent acts that can result in bodily injury) & errors & omissions (E & O) insurance (covers negligent acts, errors & omissions)
69
Q

Homeowners Package Policy

A

HO2, 3, 4, 5, 6, 8

HO4 = rental

HO6 = condo

HO8 = modified

70
Q

Named Perils Policies

A

Basic = 12 named perils

Broad = 12 basic perils + 6 perils, 18 total

71
Q

Basic Perils (12)

A

fire

vehicles (damage caused by vehicles)

lightning

smoke

windstorm

vandalism or malicious mischief

hail

explosions

riots or civil commotion

theft

aircraft

volcanic eruptions

S-L-W & F-V-V-V-H-E-A-R-T (pronounced Slow Favorite)

72
Q

Broad Perils (18)

A

12 basic perils +

falling objects

weight of ice/snow/sleet

accidental discharge/overflow of water or steam

sudden & accidental cracking, burning, bulging of appliances

freezing of plumbing, heating, air conditioning, fire sprinkler system, or appliance

sudden & accidental damage from artificially generated electrical currents

Basic + FAS-FWD (pronounced Fast Forward)

73
Q

Open Perils Policies

A

all perils covered (unless excluded)

protection from losses associated w/ all perils except those specifically excluded

provides more comprehensive coverage than the basic & broad policies

exclusions include neglect (termite damage), flood & earthquakes

74
Q

General Exclusions

A

flood, intentional loss, earth movement, neglect

75
Q

E - Personal Liability

A

bodily injury/property damage - NOT personal injury

76
Q

F- Medical Payments Coverage

A

not based on fault

does NOT cover the insured’s family

77
Q

Exclusions (apply to Coverages E & F)

A

watercraft w/ more than 25hp, business activities, motor vehicle liability, uninsured locations

78
Q

Dwelling/Other Structures

A

covered on replacement cost basis; personal property covered on ACV basis

dwelling coverage may be broad perils (HO2), open perils (HO3, HO5), or basic perils (HO8)

Personal property coverage in HO2, HO3, HO4 & HO6 are named perils & ACV - need to endorse for open perils & replacement cost

Personal property coverage in HO5 is open peril & ACV - need to endorse for replacement cost

Policies provide for loss of use: HO2 = 30%; HO3 = 30%, HO4 = 30%; HO5 = 30%; HO6 = 50%; HO8 = 10%

Policies provide small amounts of liability usually $100k - $300k, thus the need for a PLUP

Policies provide for medical payments to others w/out regards to fault

Policies have limits on certain items – cash $200, watercraft $1,500, theft of firearms $2,500, theft of silverware etc $2,500, property on premises used for business $2,500, property away from premises $500

Homeowner’s policies do NOT cover earth movement or flood – need separate policies (riders or endorsements)

Homeowners policies do NOT cover business property except de minimis, nor rental property, nor motorized vehicles used on farm, nor intentional acts by insured, nor normal wear & tear

HO2 = all broad

HO3 = all open, except broad for Part C

HO4 = broad for C & D

HO5 = all open

HO6 = broad for Parts A/C/D

HO8 = all basic

79
Q

Business Life Insurance Premiums

A

NOT deductible EXCEPT for group term

80
Q

Business Life Insurance Employer-Provided Group Term Life Insurance

A

NOT taxable to EE for 1st $50k of DB provided

81
Q

Split Dollar

A

shares costs & benefits b/t key employees & entity

any payment made by ER to split dollar plan is either a loan (collateral assignment method) or as taxable compensation (endorsement method)

if loan interest is zero (or below market rates) difference b/t market rate & actual rate is treated as taxable compensation to employee

82
Q

Disability for Businesses

A

may be group disability for EEs – fringe benefit & taxable to EEs

83
Q

Business Health Insurance

A

group plans (Indemnity, HMOs, PPOs, EPOs, & POSs)

84
Q

Business Long Term Care (LTC) Insurance

A

may be provided on group basis

85
Q

Buy-Sell Agreements

A

an agreement b/t partners/co-owners to continue business upon the death, disability, or retirement of a partner/co-owner

most are funded w/ life insurance &/or disability policies

86
Q

Cross Purchase

A

used for buy/sell agreements

protects closely-held business partners

of policies = (# partners) x (# partners - 1)

Advantage = step up in basis for remaining partners

Disadvantage = cost of policies may differ greatly d/t age differences among owners

87
Q

Entity Purchase

A

alternative to cross purchase, used for buy/sell agreements

one policy per principal owned by entity

Disadvantage = no step up in basis for remaining partners

88
Q

Buy-Sell Agreements - Tax Treatment for Deceased/Disabled Owner

A

when partner dies, their business interest gets step up in basis equal to FMV at time of death (no capital gain must be recognized)

Not so w/ disability buy-sell; as such the capital gain on the sale of the disabled partner’s business interest can be significant

89
Q

Insurance on Property - Auto

A

does NOT cover Motorcycles, Boats, Airplanes

Personal auto policy (PAP) covers liability, medical payments, uninsured motorist, damage to own auto – if replacement vehicle coverage is for 30 days, if new 14 days

insured is a person & all resident family members w/ licenses

owner of the vehicle (NOT the driver) is the primary insured

limits are expressed $100/$300/$50 ($100k for bodily injury per person, $300k per accident, $50k for property damage) coverage shifts up to state while driving for minimum coverage

Exclusions = intentional acts, rental use, & business use

uninsured motorist coverage covers insured if injured by uninsured driver; will cover an insured pedestrian hit by an uninsured or underinsured vehicle

Other-Than-Collision (Comprehensive) covers animate objects

Collision covers inanimate objects while auto is moving

90
Q

Personal Liability Umbrella Policy (PLUP)

A

need for a PLUP largely dictated by insured’s personal wealth; usually $1-$10M in excess of underlying auto & home coverage

premiums inexpensive

provides legal defense - at no cost against the policy limits

usually covers personal injury liability, plus liability of libel, slander, & defamation

provides excess liability coverage on home, cars, boats, & recreational vehicles if listed

covers all members of household & users of vehicles

excludes rental property (possible exception) business liability, vehicle racing, & intentional acts

usually will NOT cover high risk activities (street racing), liabilities resulting from crimes (DUI), or from intentional acts

91
Q

Medicare Benefits

A

federal health insurance plan for people 65 & older whether retired or still working

people who are disabled or have permanent kidney failure can get Medicare at any age

3 parts: Hospital Insurance (Part A), Medical Insurance (Part B), & Prescription Drug Coverage (Part D)

generally individuals who are 65 or older & receive Social Security benefits automatically qualify for Medicare

92
Q

Medicare Part A

A

hospital insurance, paid for by a portion of Social Security tax

helps pay for necessary medical care furnished by Medicare-certified providers, including inpatient hospital care, skilled nursing care, home health care, hospice care, & other care

of days that Medicare covers care in hospitals & skilled nursing facilities is measured in what is termed benefit periods

benefit period begins on first day patient receives services in a hospital or skilled nursing facility & ends after 60 consecutive days w/out further skilled care

no limit to # of benefit periods a beneficiary may have

deductible of $1,632 applies per benefit period

61st through 90th day of each benefit period the insured individual must pay $408 a day in form of coinsurance

any days over 90 in a benefit period are considered lifetime reserve days

60 lifetime reserve days available w/ coinsurance of $816 per day

93
Q

Medicare Part B

A

Medical insurance

optional & a premium is charged

financed by the monthly premiums paid by those who are enrolled & out of the general revenues from the U.S. Treasure

used to pay for doctors’ services, ambulance transportation, diagnostic tests, outpatient therapy services, outpatient hospital services (including ER visits, X-rays, & laboratory services), some preventative care, home healthcare services not covered by Part A

Medicare Standard Part B premium is $174.70; the Part B deductible is $240

94
Q

Items NOT Covered by Medicare Part B

A

high probability of question on this!

routine physical exams

dental care

cosmetic surgery

hearing aids

eye exams

care received in a foreign country

95
Q

Medicare Part D Subsidy

A

intended to save participants money on prescription drug costs & help protect against higher drug costs in the future

insurance companies & other private companies work w/ Medicare to offer these drug plans by negotiating discounts on drug prices

96
Q

Life Annuity Contracts

A

periodic payment to an individual that continues for a fixed period or the duration of a designated life or lives

provides protection from outliving your assets (longevity risk)

commonly used to fund retirement

NOT appropriate if you want to leave assets to your heirs

NOT a hedge against inflation

97
Q

Types of Annuities

A

immediate annuity

deferred annuity

flexible premium deferred annuity (FPDA)

single premium deferred annuity (SPDA)

fixed annuity

variable annuity

98
Q

Taxation of Annuities

A

withdrawals post 1982 annuity LIFO treatment (gains first)

withdrawals pre 1982 annuity FIFO treatment

exclusion ratio (or inclusion) for annuitized annuities

99
Q

Indemnity Health Insurance

A

pay for losses/has deductible/coinsurance on major medical & stop loss provisions/doctors are independent

100
Q

HMO

A

uses co-pay

doctors are EEs of HMO

referral needed to see specialist

101
Q

PPO

A

Preferred Provider Network

uses co-pay

Doctors are independent of insurer

Doctors agree to charge reduced rates in exchange for increased patient volume

102
Q

POS

A

point of service

combines HMO/PPO/indemnity

as insured moves among providers deductibles, co-pays change accordingly

103
Q

EPO

A

exclusive provider organization

similar to HMO but no referral needed to see a specialist

104
Q

Health Insurance Coverage (Basic or Major Medical)

A

Basic = for doctor visits etc; usually after deductible

Major Medical = if sold alone is first dollar coverage w/ coinsurance, deductible, & stop loss provision

Basic & Major Medical frequently combined in group plans

105
Q

Coinsurance for Major Medical (% Participation Clause)

A

80/20 = 80% covered by insurer, 20% insured

after deductible is met first

usually out of pocket maximum

106
Q

ACA (Obama Care) Plans

A

Bronze = plan pays 60% on average; insured 40%

Silver = plan pays 70% on average; insured 30%

Gold = plan pays 80% on average; insured 20%

Platinum = plan pays 90% on average; insured 10%

Catastrophic = plans pay less than 60% on average; available only to people under age 30 or those w/ a hardship exemption

NOTE: plans no longer have a lifetime limit or a pre-existing condition clause

107
Q

COBRA Group Health Plan for Continuance

A

applies to any ER who has a health plan & 20 or more EEs

events that create COBRA benefits = death of EE, termination (except for gross misconduct), reduction of hours, children no longer dependents d/t age, divorce, EE reaches Medicare age

if the event is catastrophic = 36 months of COBRA benefits - death, divorce, child no longer a dependent d/t age, EE reaches Medicare age

if the event is non-catastrophic = 18 months of benefits - retired, fired, reduction in hours

108
Q

COBRA - 18 Months

A

termination of employment (unless gross misconduct)

moving from full-time to part-time status

109
Q

COBRA - 29 Months

A

employee meets the Social Security definition of disability

110
Q

COBRA - 36 Months

A

death of a covered employee

divorce or legal separation of a covered employee

loss of dependent status

eligibility for Medicare

111
Q

Health Savings Accounts (HSA)

A

may be set up by individuals or employers & allow eligible individuals to save for health care costs

contributions from participant are tax-deductible

distributions for qualified medical expenses excluded from income

penalty for nonqualified expenditures = ordinary income tax & 20% penalty if owner younger than 65

can carry over unused amounts to future years & invest those amounts so that over time the value inside of the HSA can grow

112
Q

Flexible Spending Account (FSA)

A

commonly used by ERs as an EE benefit that permits EEs to defer income ($3,200 limit 2024) to be used to pay for health care expenses w/ pre-tax dollars

use it or lose it

113
Q

HSA Advantages

A

pre-tax contributions

funds carry over from year to year

funds can be invested

permits reimbursement of OTC medication purchases

can be used to pay LTC insurance premiums

114
Q

HSA Disadvantages

A

must have high deductible health plan to qualify

some HSAs have high annual fees

115
Q

FSA Advantages

A

pre-tax contributions

participants have total control over how to spend the money w/in the related health care or dependent care options

can be used for “optional” medical procedures (LASIK eye surgery, braces, etc)

can be used for child care or dependent care

permits reimbursement of OTC medication purchases

116
Q

FSA Disadvantages

A

money MUST be used by 2.5 months after end of plan year or lose it

CANNOT receive distribution amounts that are covered under another health plan

deferrals are limited

117
Q

6 Major Categories of Social Security Benefits

A
  1. Retirement benefits
  2. Disability benefits
  3. Family benefits
  4. Survivors’ benefits
  5. Medicare
  6. Supplemental Security Income (SSI) benefits; SSI benefits are NOT funded by Social Security taxes
118
Q

Social Security Benefit Reductions - Early Retirement

A

Before FRA (full retirement age)

reduction = 5/9 (1%) x months up to 36 months

plus 5/12 (1%) for additional months beyond 36

*benefit may be further reduced for early retirees if earnings too high (benefit reduced $1 for every $2 above a threshold)

119
Q

Social Security Benefit Increases - Delayed Retirement

A

8% simple interest increase per year

ex = FRA 66, delaying until age 70 results in 132% of PIA at age 66

120
Q

Social Security PIA Acronym

A

Primary Insurance Amount

121
Q

Social Security Fully Insured

A

40 quarters of coverage or one quarter for each year after age 21 but before age 62

122
Q

Social Security Currently Insured

A

at least 6 quarters of coverage in the last 13 quarters

123
Q

Social Security Disability Insured

A

before age 24 = 6 quarters of coverage in last 12 quarters

age 24 through 30 = covered for half of the available quarters after age 21

age 31 or older = must be fully insured & have 20 quarters of coverage in the last 40 quarters

124
Q

Social Security Income Tax Hurdle Amounts

A

1st Hurdle
- MFJ $32k
- All Others $25k

2nd Hurdle
- MFJ $44k
- All Others $34k

Percent of SS subject to tax: 0% up to 85%

Below first hurdle = zero tax

85% of SS benefits will be subject to tax when MAGI is above approximately 150% of the second hurdle

About 20% to 25% of SS benefits will be subject to taxation at the second hurdle

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